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Cunliffe: Telecommunications in Fast Forward

Hon David Cunliffe Minister of Communications

24 May 2006

Speech Notes Telecommunications in Fast Forward TUANZ Telecommunications Day Michael Fowler Centre, Wellington 9.45am

Introduction

Today you may not be surprised that the main topic of my talk will be our recent announcements on the telecommunications stocktake.

I'm sure many of you will have had a chance to read the cabinet paper, slightly earlier than others or I intended.

However, it is good to have the detail in the public domain. There is a clear public interest in this debate.

Put simply: this Labour-led government wants to deliver cheaper, faster broadband to all New Zealanders.

And that is what, in the long-term interests of New Zealand users, this package sets out to do.

Today, I plan to outline:

· The reasons behind the stocktake · How the stocktake was conducted · The key elements of this package and what we are trying to achieve · And when consumers can expect to get faster, cheaper broadband.

The Telecommunications Stocktake Process The purpose of the stocktake was to consider developments in the telecommunications sector as a whole over the last 3-5 years.

The primary focus was placed on the broadband market and broadband performance as a factor in economic performance. The stocktake combined extensive information gathering, the development of multiple policy options, scenario development and hypothesis testing against international best practice. It was a thorough and robust process, in which officials were assisted by specialist expertise and a range of international resources.

My officials and I also met with a number of key stakeholders, in some cases on multiple occasions. Other stakeholders provided written submissions.

My office was inundated with literally hundreds of letters, emails and faxes. The vast majority of these signalled a strong desire for reform. Problem Definition: New Zealand's Poor Broadband Performance The 'Speech from the Throne' set out a broad goal of ensuring that New Zealand enjoyed a competitive, world-class telecommunications environment.

The Prime Minister also signalled our increasing concern with New Zealand's broadband performance, in her opening address to parliament. New Zealand is in the bottom one-third of OECD countries across a range of telecommunications services pricing and broadband take-up indicators.

The evidence suggests that we are approximately 3 years behind the pack. Specifically: · Our connection speed offerings are on average still too slow.

· Our standard upload speed has been too slow for many users and has inhibited some important applications and development of advanced services.

· We are one of the few countries where restrictive data caps have been the norm.

· OECD rankings on the average per person investment in telecommunications infrastructure placed us at 22nd out of thirty nations.

· Similarly, the OECD's mid 2005 rankings for the level of broadband uptake also placed us at 22nd out of thirty. Quite frankly, these figures are unacceptable. This is clearly not a sustainable situation for a small, smart country to be in.

Why Broadband Matters There are many reasons why broadband matters. Studies show that broadband and advanced ICT services are a critical enabler of innovation, productivity, GDP, growth and therefore are central to achieving the government's key goal of economic transformation. For example:

· The Economist Intelligence Unit, using data from 60 countries and a model that took two years to build – surmised that we could boost New Zealand's GDP by $13.1bn by 2030 (about 10% of current GDP) if we could reach the top quartile for broadband performance in the OECD by 2015. (I am not saying these numbers are exact but even if GDP growth were half this – it would still be a large benefit to New Zealand).

· KPMG and Alcatel forecasts show that fast broadband boosts productivity by 0.5 to 2.5%; and Allen Consulting and Ericsson estimated a return of $8 to GDP for every $1 invested in broadband.

The government has been very clear that advanced broadband and the services it enables are seen as a critical infrastructure for the 21st Century. It is a necessary condition for economic transformation. The seriousness of the stocktake review and resulting policy direction reflects that.

So, it is clear that if we are serious about building a knowledge-based economy, lifting our broadband performance is imperative. Let's consider why. Advanced broadband services (so-called triple-play offerings of data, voice and video/TV services) are growing in importance.

Evidence suggests that advanced services will have a greater transformational effect on our economy and should be reflected in any revised objective. High speed broadband brings about innovative new services and can help transform sectors, government services, and offer greater benefits for users. The possibilities for advanced broadband services are significant – one newspaper noted the following examples:

· Healthcare: People living in rural areas could visit their general practitioners and have results, such as x-rays instantly sent to specialists in main centres.

· Commerce: Buying goods and services on the internet will lead to lower costs for business and consumers, and time savings for shoppers.

· Entertainment: When music television and video is delivered over the internet consumers will be able to choose what they want to see and hear, and when. Content will become increasingly consumer-driven. A Broadband world will increasingly make us all digital producers as well as digital consumers. · Exports: New Zealand businesses will see their international markets open up, and will sell more goods and services over the Internet. Global business value chains will be enabled by broadband communications and information processing power.

>From a consumer perspective, we can also learn from the growth of multiplay broadband service offerings in France.

Where LLU has been implemented French people enjoy:

· Upgraded triple play broadband to quadruple play;

· Internet access at up to 24 Mbit/s download and 1Mbits/s upload; · Access to Freebox TV audiovisual services (over 200 television channels, 100 of which are free-to-air channels);

· Unlimited calls, using Freebox, free of charge to fixed lines in 14 countries;

· Free directory enquiries service;

· The ability to make and receive calls from any computer connected to the Internet, anywhere in the world, using the Freebox telephone account

Clearly, advanced broadband services can enrich the lives of New Zealanders in numerous ways. But with the current broadband offerings, Kiwis mums, dads, kids and businesses are unable to reap the full benefits. Diagnosis: Why the Status Quo is not Working

The status quo is clearly not delivering the outcomes we need.

The evidence before us is that current policies are not sufficient to close the performance gap.

A key reason for the poor performance is the lack of effective competition in key market areas.

Looking at the top countries in the OECD for broadband, it was clear that there was a strong link between faster, cheaper broadband and competitive markets.

The stocktake review considered a range of reasons for New Zealand's poor performance.

Firstly competitive conditions were found to be inadequate.

The local loop is an access bottleneck that restricts the development of effective competition.

New entrants require access on fair and non-discriminatory terms to that access network to be able to provide high quality, cost effective and differentiated services.

Discrimination issues drew strong comments from stakeholders. A common theme in submissions was that the local loop playing field is not level.

Second, progress since local loop unbundling was last considered in 2003 has, overall, been disappointing.

Broadband performance – despite much effort - has only just kept pace with previous low OECD rankings.

Moreover in accepting the commission's recommendation in 2003, the then Minister, Hon Paul Swain, predicated his response on the expectation that the decision would lead to the co-operative development of an effective wholesale market, and provide incentives for Telecom to quickly deploy its Next Generation Network (NGN).

However, the investment in residential NGN infrastructure has not developed as quickly as anticipated.

And the incumbent's voluntary commitments with regard to 250,000 total broadband connections by December 2005 were met; but the one-third wholesale connections and facilitation of a regulated wholesale UBS service, were in the government and commerce commission's view, not delivered as expected.

In addition to local loop access, the stocktake also noted the limited competitive pricing in some segments of the mobile market, and high mobile termination rates.

Mobile roaming, colocation and the absence of wholesale competition among mobile virtual network operators were identified as a proper focus for further work by the Commission.

The stocktake recognised the need for efficient spectrum allocation: policies that would facilitate the entry of new wireless technologies such as WIMAX, among others.

It noted that aspects of the Telecommunications Service Obligation (TSO) require a review.

So, as is already very clear, there is no single silver bullet that will take us from our current trajectory to the top half or the top quarter of the OECD.

The telecommunications environment is a dynamic and complex one – new technologies are constantly changing the landscape.

Some technology and commercial uncertainty is inevitable in such dynamic conditions.

For this reason, regulation is generally directed at improving competition rather than relying on periodic regulatory intervention.

In weighing up policy options, New Zealand's characteristics of population density, geography and income need to be taken into account.

However the stocktake judged those to be insufficient to explain our relative position.

Options Analysis

To develop the best package of measures designed to address these underlying concerns, a range of alternative scenarios and policy options were considered:
· An enhanced version of the status quo settings (including already announced improvements).

· LLU and wholesaling measures.

· A range of incumbent separation options and

· Alternative infrastructure incentives and provision.

Our analysis made clear that the best results were from a mutually supporting package of policies, future-proofed against ongoing market changes.

We recognised the importance of investment both by incumbents and entrants and considered information placed before the stocktake by a range of parties.

In particular the stocktake had regard to the EU/OECD "ladder of investment" approach that drives wholesale competitors towards investment in their own infrastructure.

The importance of appropriate pricing rules for a range of the regulatory tools identified was recognised in this regard. The Proposed Package

The key components of the proposed package are as follows:

1. Facilitating competition by improving access at the wholesale level to the fixed local-loop telecommunications network, through:

· Introducing local loop unbundling;

· Removing constraints on the regulated Unbundled Bitstream Service, including providing for "Naked DSL";

· To empower the Telecommunications Commissioner to implement accounting separation by:

o Requiring the preparation and public disclosure of information by access providers to facilitate compliance with the applicable access principles set out in Schedule 1 of the Act;

o Requiring the preparation and public disclosure of regulatory accounts by Telecom, including those of wholesale and retail business operations, · On structural separation options (as set out in the Cabinet minute):

o Operational and structural separation are options on which the government is prepared to consider the evidence and encourage the select committee to seek submissions on those options;

o Officials are to continue their consideration of the separation options parallel to the select committee process.

2. Encouraging investment in alternative infrastructure (such as fibre, wireless and satellite networks), including by: ·

Reviewing public sector investment in telecommunications infrastructure to encourage a whole-of-government approach;

· Reviewing whether Telecom's ability to reduce local prices solely in response to new competing infrastructure investment should be constrained;

· Developing a rural package and expansion of the Digital Strategy Broadband Challenge fund in the 2007/08 Budget round;

· Ensuring competitive access to spectrum for new wireless applications.

3. Future-proofing the regulatory environment to technology change and market dynamics, including by:

· Empowering the Telecommunications Commissioner to undertake strategic reviews of sector performance;

· Reviewing the Telecommunications Service Obligations (TSO), with a focus particularly on delivery of rural services;

· Undertaking further analysis of the relative costs and benefits of structural and operational separation options.

4. Continuing the development and implementation of the Digital Strategy and encouraging the smart use of information and communications technology (ICT)

.We seek to build upon the Digital Strategy to boost demand and accelerate take up amongst under served communities.

Myths and Risk Management

The stocktake identified a number of risks that need to be identified and managed in the delivery of the new regulatory framework. A full list is contained in the cabinet paper.

Let me mention three in particular that among the overwhelming positive public and industry reaction to the proposed changes, have drawn the attention of some commentators.

1. The myth that rural communities will be disadvantaged by this package. The rural sector is important to New Zealand.

The government takes the delivery of telecommunications and broadband services to rural and remote areas seriously and certainly does not want to see these communities disadvantaged.

We believe in the long term that everyone, including rural communities, will benefit from a competitive environment. We accept however, there may be some variation in the rate of that improvement.

Already the government's PROBE initiative has brought broadband to rural communities and schools, led to an increase in national broadband coverage from 72 percent of telephone lines before Probe to over 95 percent today.

It has been encouraging to note that some telecommunications companies have already signalled a willingness to invest in rural areas with wireless solutions such as WIMAX and mobile broadband services.

We are developing a strategy for broadband in rural New Zealand, which will fully recognise the role that the market and competing technologies can play. It will also involve a review of public sector spending on telecommunications infrastructure and consideration of new initiatives in next year's budget round – building on the successful Broadband Challenge and Community Partnership Fund.

2. The second myth is that this is "regulatory creep"

The proposed access regulation regime will still be less interventionist than regulatory regimes in most developed countries.

The purpose of the rule changes is to increase competition.

In proposing regulatory amendments, officials have had regard for the principles of regulatory best practice for utility regulation in New Zealand which require flexibility on the one hand, and consistency and predictability on the other.

3. Pricing Issues

I recognise there has been some considerable interest in the pricing related to these services.

Pricing rules, experessed in general terms in the cabinet paper, balance the need for ensuring Telecom is able to recover efficient costs and returns on investment for providing the service with facilitating competition and entry by new investors.

Detailed pricing rules will be carefully set by the Commission to maintain incentives for both the incumbent and entrants to invest in infrastructure and service provision.

As mentioned earlier, the paper also makes mention of the ladder of investment approach. This is commonly adopted in the EU and aims to increase overall investment levels, and drive wholesale competitors toward investment in their own infrastructure.

The long run aim of such policies is competition on level terms among operators, and it recognises the importance of pricing wholesale access products appropriately so as to maintain incentives for progressive alternative infrastructure investment.

Next Steps

So, finally, when will consumers benefit from cheaper, faster broadband?

A decision has been made but it will take time to see it through to fruition.

It is very important that the expectations of both the public and the industry are realistic.

This is a comprehensive package of measures that represent a significant change of direction for the sector. Regulation is a careful process and with good reason.

It is the government's intention to introduce a Telecommunications Amendment Bill into the House soon after mid-year.

We intend that its passage will be expeditious, although careful select committee consideration will be required.

Support has been indicated by the Progressives, the Green Party, New Zealand First and United Future.

National has indicated support in principle at least as far as the select committee.

The legislative process will take the balance of 2006 and potentially early 2007.

The Commission will then need to research and operationalise the requirements of the Act – a very important part of the process that will take further time.

Full market effects of the reform may not be felt until 2007/2008.

But already, since this package was announced, some market players have announced plans to increase investment.

There have been specific indications of investment in DSLAMs required to make LLU happen, plans for WIMAX deployment, and papers have reported on plans to lay fibre to homes in the Auckland region.

These announcements are very encouraging.

I have been pleased with the way New Zealanders overall have received this package.

Following the announcement, my office again received a large number of emails, nearly all of them, expressing the view that this is the right decision for New Zealand.

Conclusion

New Zealanders have been paying far too much for far too little, in terms of broadband, for far too long.

Our goal is clear - to reach the top quarter of the OECD for broadband performance by 2015 thus building the knowledge-based economy New Zealand needs to prosper.

We are creating the right regulatory mix in the telecommunications environment to see this happens. We also have strong support from a wide-range of New Zealanders.

The next step is for the telecommunications industry to respond to these new conditions.

We need you to realise the new potential in the market for innovation, growth and development.

We need you to help New Zealand realise its digital future.

And ultimately, we need you to deliver cheaper, faster broadband to New Zealanders, and to play your part in New Zealand's exciting and necessary economic transformation.

ENDS


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