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Playing the Telecommunications Game in New Zealand the Evolving Story of Telecommunications Public Policy in New Zealand

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Playing the Telecommunications Game in New Zealand the Evolving Story of Telecommunications Public Policy in New Zealand NETWORK NEUTRALITY AND COMPETITION ISSUES PLAYING THE TELECOMMUNICATIONS GAME IN NEW ZEALAND THE EVOLVING STORY OF TELECOMMUNICATIONS PUBLIC POLICY IN NEW ZEALAND Murray Milner, Milner Consulting Limited IN THE BEGINNING ... New Zealand’s first telecommunication service arrived in 1862, when an electric telegraph line was established between Christchurch and Lyttelton, over a distance of 20km. After this event, the number and variety of both private and military transmission facilities expanded rapidly across New Zealand. The first telegraph service with Australia was launched in 1876 and this was followed by the first manual telephone exchange in 1881, with 30 customers connected. At this time, the New Zealand Post and Telegraph Department (NZPTD) was established to train and employ the country’s first public telecommunication operators. By 1930 the NZPTD had successfully connected all the main centres in New Zealand with a toll and telegraph network serving some 125,000 customers. Automatic telephone exchanges were introduced into the emerging network in the early 1900s, based on electro-mechanical switch technologies. This type of exchange evolved through until the late 1970s. A limited form of subscriber toll dialling (STD) service was introduced in 1953, but the real advances in long distance calls came with the provision of a national backbone of microwave radio technology installed in 1959. Throughout this period, various submarine cables were deployed to link New Zealand with Australia, North America, Europe and the South Pacific. The international capacity and route diversity was greatly enhanced with the introduction of a satellite earth station at Warkworth, North of Auckland in 1971, using the INTELSAT satellite network (Newman 2008). The pace of change of technology and the take-up of service accelerated through the 1960s and 1970s. Crossbar switching technology was introduced in the early 1970s to cope with the growth and by the late 1970s this technology was being replaced by the first generation of elec- tronic switches. By the early 1980s the New Zealand Post Office provided services to over 95% of homes and businesses in New Zealand, and most of these homes had access to automated telephone service to anywhere in New Zealand and throughout the world. Furthermore, businesses could access a variety of sophisticated data services to meet their special needs for communication. TELECOM NEW ZEALAND LIMITED IS BORN In the mid 1980s, the New Zealand Government began a major programme to corporatise gov- ernment departments. The New Zealand Post Office was one of the departments in their sights and in 1987 was broken into its three component parts: New Zealand Post, PostBank and Telecom New Zealand. The Telecom Corporation of New Zealand (TCNZ 2009) was incorporated as a State Owned Enterprise on 1 February 1987 and assets valued at NZD3.2B were transferred to the new organisation as at 1 April 1987. The new Telecom was charged with operating as a TELECOMMUNICATIONS JOURNAL OF AUSTRALIA, VOLUME 59, NUMBER 2, 2009 MONASH UNIVERSITY EPRESS 26.1 commercial organisation, in a commercial environment. It would be required to make a profit, and it would have to do this by providing the standard and range of services New Zealanders had a right to expect. As at 1 April 1987, some deregulation of the telecommunications market in New Zealand was introduced with competition in the provision of Customer Premises Equipment. However, a timetable was put in place so that by April 1989; the telecommunications market in New Zealand would be fully liberalised. By this time, Telecom New Zealand Limited was doing business in one of the most open telecommunication marketplaces in the world. Anyone could enter the market operating under the existing commercial and fair trading legislation applicable to all enterprises in New Zealand. Initially in order to meet the emerging competitive market, Telecom broke itself up into a new organisation structure based on Regional Operating Companies (ROCs), while retaining only a very small corporate office in Wellington. The ROCs were given a mandate to deliver excellent customer service to their regions while a national company provided connectivity cov- erage of the entire country. TELECOM NEW ZEALAND GOES UNDER THE HAMMER On 12 September 1990, the Telecom Corporation of New Zealand was sold by the Government to a consortium headed by two United States based companies: Bell Atlantic and Ameritech. The other founding members of the consortium were Freightways Holdings Limited and Fay Richwhite Holdings Limited, both New Zealand owned companies. The sale price was NZD4.25B. Associated with the sale of Telecom was a single “Kiwi Share”. The Kiwi Share involved the provision of certain guarantees written into Telecom’s Articles of Association. Known as the Telecom Pledges, these guarantees ensure that: 1. Local free calling will remain available to all residential customers, 2. The Standard Residential Rental for a phone line will not rise faster than the cost of living, unless Telecom’s regional operating company profits are unreasonably affected, 3. Phone line rentals for residential customers in rural areas will not be higher than those in the cities, and residential service will remain as widely available as it is at present (12 September 1990), 4. There would be one or more public share offerings over the first three years of private ownership. Initially, the new Telecom New Zealand Limited continued to operate with its regional oper- ating company structure. However, in 1991, this was reviewed and a more centralised national structure was introduced. This move coincided with the first significant moves by well-funded competitors into the then fully deregulated market in New Zealand. COMPETITION ARRIVES IN THE TELECOMMUNICATIONS MARKET From the early 1990s, competitors to Telecom New Zealand began to appear in the market. Initially these came in the form of toll bypass service providers. During the decade, this evolved into both wired and wireless competition across all aspects of the telecommunications market. 26.2 PLAYING THE TELECOMMUNICATIONS GAME IN NZ NETWORK NEUTRALITY AND COMPETITION ISSUES Two separate consortia initially began separate interconnection negotiations with Telecom in December 1989, but by May 1990 had decided to merge their interest to form Clear Commu- nications. Within six months the companies had confirmed their investment in the venture and by April 1991, Clear Communications was able to offer domestic and international toll bypass services. Clear Communications was owned equally by British Telecom, MCI International, Television New Zealand Ltd and Todd Corporation Ltd. By the mid 1990s, Clear Communications employed approximately 1000 staff, and had invested more than NZD250M in fixed assets in New Zealand. Clear Communications and Telecom agreed on 25 actual points of interconnect (POI) and 19 notional points of interconnect in 42 different localities (or separate free calling areas) throughout the country. In localities served by a notional point of interconnect, Clear's customers' toll calls were trunked to the nearest Telecom exchange with billing facilities, at which point they are physically handed over to Clear. Using these facilities, Clear Communications achieved approximately 22 percent of market share in the provision of domestic toll services in New Zealand by 1994. Clear's operations were profitable during the latter half of the 1990s. This achievement exceeded the results attained in many other countries that permitted telecommunic- ations competition, with a similar start-up period. In September 1995, Clear reached a new heads of agreement on local service interconnection with Telecom, which culminated in a formal local telephone service interconnect agreement in March 1996. This agreement also included new toll bypass interconnection arrangements. Clear then announced the availability of its business telephone service in the Auckland, Wellington and Christchurch central business districts and introduced a range of value added services, such as 0800 freephone. In 1992, Bell South acquired spectrum in the 900MHz band and started to deploy a national GSM based cellular network in direct competition to Telecom’s AMPS based cellular network, operating in the 850MHz band. BellSouth struggled to gain market share against Telecom, largely due to its smaller coverage footprint than Telecom. In the New Zealand market, it appeared that coverage was the largest driver of consumer choice. BellSouth was eventually acquired by Vodafone in November 1998 for a sum of about NZD750M. Vodafone (Vodafone 2009) expan- ded the coverage of its network and has never looked back since. By 2005 Vodafone surpassed Telecom in terms of market share for mobile services. Saturn Communications started life as a cable TV company with operations on the Kapiti Coast, just north of Wellington. Saturn Communications, owned by Australian company Austar, made its entrance into the local market by acquiring the former Kiwi Cable company (formed in 1994). Saturn then expanded its cable TV services into the Wellington and Christchurch areas, and added phone and Internet services into the mix. Telstra New Zealand was set up in 1996 by Telstra as part of Telstra's international expansion. Competing with both Saturn Communications and Clear Communications, Telstra New Zealand initially focused on providing services to top tier international organisations, who were already Telstra clients in
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