See our analysis of the December 2006 OECD broadband rankings.

So Telecom New Zealand (Telecom) thinks that New Zealand’s lowly position (22 out of 30 countries, Exhibit 1) in the June 2005 OECD broadband penetration rankings is due to the existence of free local calling? “Free” local calling exists in Canada and the United States but it has not hindered broadband uptake there. More neutral parties including the New Zealand Communications Minister, the OECD and the president of InternetNZ agree that the real reason for New Zealand’s position in the ranking is high prices.

Exhibit 1: Broadband penetration in OECD countries, 2004–2005 [Source: OECD]

In 2004 Network Strategies benchmarked Telecom's ADSL services against those of incumbent operators internationally. The results confirmed our view that:

• while Telecom’s lower bandwidth (256kbit/s) residential service was attractively priced at low usage levels (500Mbytes/month) (Exhibit 2)
• at higher usage levels Telecom’s high speed residential services were priced at a far higher level than other operators (Exhibit 3)
• Telecom’s usage allowances were relatively small when compared with potential usage.

Exhibit 2: Monthly charges for lower bandwidth residential services with usage of 500Mbytes per month [Source: Network Strategies, March 2004]

Exhibit 3: Monthly charges for high bandwidth residential services with usage of 6Gbytes per month [Source: Network Strategies, March 2004]

Telecom’s benchmarked ADSL plans have relatively low (from 500Mbytes) data caps beyond which per Mbyte excess usage charges (EUCs) are incurred. Usage-based plans are a point of contention and can deter customers from seeking data-rich multimedia experiences – a key driver for broadband uptake. Choosing an inappropriate service could prove to be very expensive should you exceed the monthly usage limit, which is likely to happen if you do not monitor usage frequently (especially if there are children at home). Usage-based plans are far less prevalent in jurisdictions with better developed broadband markets. A commonly cited reason for the application of EUCs is that international bandwidth is expensive. However, many services share the same international bandwidth, resulting in economies of scale. And not all traffic is international traffic – TelstraClear’s cable modem services have different rates for national and international traffic.

Telecom has modified its pricing and services significantly over the past 18 months:

• prices have decreased
• monthly usage limits have increased
• some services have two variants – one where the bandwidth reverts to dial-up rate instead of incurring EUCs and one where EUCs are incurred but the bandwidth does not change.

Telecom is also aggressively marketing its services, in line with its current strategy of increasing its broadband subscriber base. Competition has also increased from:

• ADSL (ISPs reselling Telecom ADSL)
• cable modem (TelstraClear)
• fibre (CityLink)
• wireless technologies (Wired Country and Woosh Wireless).

While the level of competition has increased, it could have been increased further by mandating local loop unbundling (LLU). However, in 2003 the New Zealand regulator recommended against it, despite a favourable cost benefit analysis (CBA), arguing that the benefits of unbundling were not great enough to warrant unbundling at that stage. The Communications Minister could and should have gone ahead with LLU all the same but a news report in the Dominion Post claims that the Government was dissuaded by Telecom lobbying. Network Strategies reviewed the CBA and found it be valid. The Government has not set a timeframe for revisiting the topic of LLU, though its decision is under continuous review based on the effectiveness of Telecom’s broadband wholesaling activities. We believe that the New Zealand Government’s failure to mandate LLU:

• will delay the introduction of more advanced services including DVD quality streamed TV over ADSL2+ and VDSL – international deployment of services using these technologies is increasing in momentum
• will allow Telecom to achieve near-monopoly control of such advanced services
• may result in New Zealand slipping further down the OECD ranking as worse-ranked jurisdictions, especially those supported by the European Commission’s New Regulatory Framework, take advantage of LLU.

The New Zealand Commerce Commission’s Final Determination on Telecom’s Unbundled Bitstream Service (UBS) was released on 20 December 2005. This sets the price and non price conditions of the UBS service which Telecom must make available to TelstraClear. The UBS service will allow TelstraClear to offer consumers differentiated services at bandwidths up to 7.6Mbit/s downstream and 128kbit/s upstream. However:

• Telecom is not obliged to offer the regulated UBS product to service providers other than TelstraClear
• the UBS cannot be used to offer services which require broadband upstream bandwidth
• also on 20 December, in decidedly un-Christmassy fashion, Telecom announced that it is considering appealing the Determination.

We expect that Telecom’s marketing efforts, the introduction of the UBS and increasing facilities-based competition will result in a significant increase in broadband take-up in New Zealand. However, this might not be enough to defend New Zealand’s position in the OECD rankings as other jurisdictions’ broadband markets become increasingly competitive.