Telecom’s profit

December 20th, 2010 at 4:00 pm by David Farrar

Telecom has just published their second set of regulatory accounts, which breaks down their income, expenses and profit between different sections. The 2010 historical cost accounts show:

  • Access Services (Chorus) – a profit of $571m on revenue of $1,059m, so profit is 54% of revenue
  • Wholesale Services – a loss of $10m on revenue of $925m, so profit is -1% of revenue
  • Retail Services – a profit of $143m on revenue of $3,301m, so profit is 4% of revenue

This shows that basically even Telecom Wholesale struggles to make a profit because the charges from Chorus are so high.

This is why structural separation will be a good thing (if done properly), as Telecom will have to compete for its profit, not just use the monopoly infrastructure to get it.

All about Telecom

November 12th, 2010 at 2:00 pm by David Farrar

Four recent Telecom issues, so will talk about them all in the one post.

First they have a new data roaming deal.

The new pricing gives customers 100 megabytes (MB) of mobile data for $100 while roaming overseas in these locations that’s the equivalent of $1/MB.

Customers will be charged $8.00/MB for the first 12.5MB and a remaining 87.5MB worth of data for the rest of their billing month will be free.

A year ago we were all paying $30/MB for roaming data, so this is a good step in the right direction.

If you are on a big trip and will use close to 100 MB this is a damn good deal. If you will only use 10 MB or so, then not so great.

Vodafone charge $5/MB in Australia and $10/MB elsewhere (off memory). So if you plan to use more than 20 MB in Australia Telecom are better. And for US and UK they are cheaper at any rate.

My personal price point is around $1 – $2/MB. I will grudgingly pay that for international data for my mobile devices.

Secondly Stuff reports on the UFB tender:

Telecom will today step up its campaign to become the Government’s broadband partner, releasing a poll on its website that says more Kiwis would prefer its network arm Chorus got the job of building the ultrafast broadband network than electricity lines companies headed by Vector. …

UMR said 48 per cent of those polled would prefer to see Telecom broken up and have “an independent, stand-alone Chorus extend the existing fibre network”, while 28 per cent favoured the Government investing in a new network rolled out by electricity lines companies led by Vector.

Vector spokeswoman Philippa White responded: “Essentially the decision as to who will partner with the Government for the UFB build sits with Crown Fibre Holdings”.

The poll is interesting but to some degree irrelevant. Because it ignores the most important factor – cost.

If the Regional Fibre Group/Vector and Telecom/Chorus both say “Yes we can do fibre to the home to 75% of NZ if the Crown invests $1.5b”, then my view is you would absolutely go with Telecom/Chorus due to their existing infrastructure.

If the two bidders are even “close” to each other – ie Chorus says we can do it for $1.7b and Vector/RFG for $1.5b, then you’d probably still go with Telecom/Chorus – just to avoid the possibility of Telecom using the copper network to make the fibre network unprofitable by undercutting them.

But what the poll ignores, is that there may be a large difference between the two bids. If Vector/RFG are saying we can do 75% in 10 years for $1.5b and Telecom/Chorus are saying we can do 75% but need $2.4b to do it within 10 years, then one goes with Vector (in my opinion). And this scenario is not impossible. The lines companies already have infrastructure assets and resource consents which may allow them to do the job far cheaper than even a structurally separated Chorus.

So at the end of the day it is not a popularity contest between Telecom and Vector. The actual commercial details of their bids are vital.

Thirdly, Telecom have put together a one stop shop website about UFB and their bid. I’ve already read most of the site – lots of useful info there.

Finally, we have an announcement from Telecom and Vodafone about a joint bid for rural broadband:

Telecom and Vodafone have announced they have made a joint bid for the Government’s $300 million rural broadband initiative, bids for which are due in today.

Telecom chief executive Paul Reynolds said the solution would New Zealand’s two largest telecommunications providers “combining their extensive resources and skills to bring the benefits of high speed broadband to rural communities as quickly as possible”.

One goal of the rural broadband initiative is to ensure 93 per cent of New Zealand’s 900 rural schools have access to 100 megabit per second broadband, with the rest getting a 10Mbps service.

The other goal is that 80 per cent of rural New Zealanders get a 5Mbps service to their homes, with the rest able to access broadband with a speed of at least 1Mbps.

Telecom said the joint solution would involve extending Telecom’s existing fibre infrastructure to key rural points of presence, including schools and hospitals, and expanding Vodafone’s wireless infrastructure “that harnesses the power of this fibre to deliver high speed broadband services wirelessly”.

Telecom said any service provider would be able toretail services over the new infrastructure. “This means that rural customers will have not only faster data services but also a much wider choice of technologies and suppliers for these services.”

Telecom would be responsible for building fibre to schools and hospitals, cellsites and rural exchanges and cabinets.

Vodafone would be responsible for the design and build of “open access tower infrastructure” that Vodafone and Telecom XT would share, “as indeed could any other wireless service provider who wishes to do so”.

I’m very supportive of this. I think open access cellphone towers are where the future is. It makes a lot of sense economically, and from a resource consent point of view, to share this infrastructure.

Once we do have announcements on who will be the local (or national) fibre companies, there could well be a role for them in providing future cellphone towers, which Telecom, Vodafone, 2 degrees etc could all put gear on. The fibre company of course would provide high capacity backhaul. There are some technical challenges around size of towers and having all the gear high enough to get a good signal, but these are workable.

So good to see Telecom and Vodafone moving in this direction.

Vodafone v Telecom speeds in Dunedin

October 2nd, 2010 at 2:00 pm by David Farrar

A reader has sent me details of speed testing on an iPhone4 in Dunedin, comparing networks.

The author also has a website, detailing the tests.

He notes these are not a general comparison of speeds between networks, but a comparison on the iPhone 4 only, in Dunedin. He did try six different locations there and his conclusion was that Telecom XT provides far greater speeds – but only in places where it works. In two places a good signal could not be located.

Telecom split confirmed

August 2nd, 2010 at 7:22 pm by David Farrar

Stuff reports:

Telecom has confirmed plans to split into two businesses in a bid to take part in the government’s ultra fast broadband scheme.

The company said today it proposed to create a new company, “Chorus2” as a separate standalone entity through a demerger – a process giving existing shareholders pro rata stakes in the new company.

I have been a long-term proponent of structural separation, and believe it will be good for shareholders and good for the country.

While on separation day, the shareholdings of the two companies will be the same, over time they will attract different profiles of shareholders. The main Telecom will be a competitive business paying higher dividends, but with more risk involved.

Chorus will be an infrastructure company, paying lower dividends, but with much guaranteed business. In time I would expect companies like Infratril to seek stakes in it.

While the Government will claim the decision is nothing to do with them, the reality is that by setting rules around ownership for the fibre to the home initiative, the Govt has been the catalyst for this decision which will correct a major problem of the last 20 or so years – a vertically integrated monopoly. The removal of vertical integration means we will get better choice and competition at wholesale and retail levels.

Telecom’s decision to split Chorus off will significantly increase its chances at winning some or even all of the regions for the fibre initiative. However it does not mean they are automatically the preferred choice. Companies like Vector may be able to do it cheaper in Auckland because of their existing infrastructure.

Structural separation is a pre-condition to full involvement in the fibre initiative, but it is not a guarantee of success.

There may be options out there though, such as Chorus gaining the nation-wide contract and sub-contracting companies like Vector and Citylink where they already have assets. Or Chorus could buy a company like Citylink.

Alternatively the Regional Fibre Group could get ambitious and aim to buy 51% of Chorus. It is going to be an interesting two to three months.

XT v Vodafone for the iPad

July 26th, 2010 at 6:57 pm by David Farrar

I like this aggressive little piece of comparative advertising, comparing the performance of two iPads – one on Telecom’s XT and one on Vodafone.

Basically XT kicks butt in the more rural locations, but also is faster even parked outside Vodafone’s HQ. It’s a smart wee video.

Now what I’d like to know is if other people can get the same results, as shown in the video. The speedtests should be easy to replicate.

Well done Paul Reynolds

May 31st, 2010 at 4:41 pm by David Farrar

A reader recently emailed Telecom CEO Paul Reynolds saying:

Mr Reynolds

I have just changed my account to the Total Home package.

I live in Pukekohe, Franklin County. In November 2010 we will become part of the Auckland SuperCity.

There appears to be a lot of confusion amongst your staff on how this change applies to my account.

Could you please confirm that in November 2010, the base charge on my Total Home account will change from $109 per month to $99 per month.

Would you please m ake certain that your staff also know this to avoid the frustrating confusion (in one case a “hang up” – since dealt with)

To his great surprise he got a reply from Paul Reynolds himself, saying:

Thanks for your note.  I am not personally aware of any Telecom tariff changes consequent upon the change to Auckland Super City.  However I have asked CEO Retail, Alan Gourdie, to look into the source of miscommunication and get back to you.

I am very impressed that the CEO of Telecom actually takes the time to reply to an e-mail from a customer, rather than just forward it onto someone else to do.

How many other large companies would have CEOs do the same?

Structural Separation Options

May 31st, 2010 at 9:00 am by David Farrar

Tom Pullar-Strecker writes:

The proposal that the Government take a direct stake in Telecom’s network arm Chorus is alive and well, after briefly being misdiagnosed with an acute case of “copper-poisoning”.

Telecom chief executive Paul Reynolds was leaning towards a full demerger of Chorus when he briefed analysts on options for the possible breakup of Telecom on Thursday, the idea being that Telecom shareholders would be issued with shares in Chorus, which would become a separate listed company.

But the two options are not incompatible. The Government could take a stake in Chorus and the remaining shares could be distributed to Telecom shareholders. Indeed, that may be the best outcome. Nor is there a reason why Telecom shouldn’t be allowed to retain a minority stake in Chorus under that or any other scenario. The more investors the merrier.

I am supportive of structural separation of Telecom. And I believe the preferable way to do it, is to issue all existing share-holders direct shares in Chorus. Over time they would attract infrastructure investors seeking lower but safer returns, while Telecom would attract investors in a competitive higher profit arena.

I would place a limit of any “customer” of Chorus owning more than a certain percentage – say 5% or 10%.

It makes no sense for the Government to set up a separate fibre company to partner with a demerged Chorus to lay fibre to three-quarters of New Zealand under its ultrafast broadband (UFB) investment initiative. After talking to Mr Reynolds following the investor briefing, it is clear that is not what he is suggesting.

“We see a demerged business, somewhat related to the existing Chorus, containing both copper and fibre into which the Government and Crown Fibre Holdings could invest on a nationwide basis and with which others could partner. The concept is you are building one national access business that has copper and fibre in it.”

This is certainly an option. One could put the $1.5 billion into Chorus as capital, with special shares not requiring a dividend (for example).

However one has to also be careful with assuming that even a structurally separated Chorus is automatically the most efficient and effective provider of fibre to the home in all areas.

From what I have seen (including a detailed study of the likely costs), electricity lines companies (such as Vector) will be able to roll out fibre to the home considerably cheaper than telecommunication companies due to their existing assets and resources consents. Vector for example has a strong case in Auckland.

There may be a win-win though if Chorus sub-contracted work in certain areas to companies such as Vector and Citylink, if they can do the job more efficiently. Maybe Vector would even want to take a stake in a separated Chorus?

We also have Axia from Canada in the fray, with considerable experience in rolling out fibre. They also may be offering a cheaper or better option than a separated Chorus. I don’t know, not having seen their bids.

I regard it as a major plus, that the process to date has led to Telecom willing to go down the structural separation path. However that does not mean they are automatically the successful bidder.

The decisions in this area will have a profound impact on NZ infrastructure for the next 30+ years. For my 2c the Government should not rush into a decision. It is much more important to get this right, than to worry about whether or not the actual roll-out starts on schedule.

The XT Report

May 7th, 2010 at 11:47 am by David Farrar

Telecom has released a summary of the report into the multiple failures of their new XT network.

My two word summary is speed wobbles.

To quote the report:

  1. The network failed because the network and supporting operations were not ready to manage the levels of traffic it experienced
  2. Software issues contributed to network instability
  3. Although the XT network was designed to initially provide planned coverage that matched the CDMA network the initial configuration of the XT network and, some network build issues, led to coverage variability
  4. Some aspects of the network architecture are overly complex meaning that any faults are difficult to find and rectify
  5. Immature operational management systems and process failures contributed to the impact of network issues.

No 1 is the big issue, and the rest to my mind seem to be just compounding factors.

This report should be the turning point for Telecom to start restoring faith in XT and its brand. You need a report pointing out the errors, so people think you are now capable of fixing them.

Of course if another major outage was to occur, that would be undermine the recovery of the brand in a major way.

Telecom have also released their third quarter results which are a bit stronger I suspect than expected:

Telecom New Zealand has today announced adjusted Earnings Before Interest, Taxation Depreciation and Amortisation (EBITDA) of NZ$1,336 million for the nine months to 31 March 2010, down 1.9% on the equivalent nine months in the previous financial year and in line with guidance.

The quarter contained a Southern Cross dividend of $14m, versus $40m in Q3 FY09.

While adjusted revenue for the nine months fell by 7.7%, to $3,936m, adjusted operating expenses fell faster, to $2,600m, a 10.4% decrease on the equivalent nine months.

The other big issue for Telecom will be the results of the fibre to the home tender.

Text problems

May 5th, 2010 at 12:00 pm by David Farrar

The Dom Post reports:

Text messages have been mysteriously altered between sender and recipient in at least 20 cases, prompting a Telecom investigation.

Salvation Army church leader Steve Molen discovered the glitch last week when he sent a text to 10 people to remind them of an upcoming dinner.

It ended on a lighthearted note with “bring a date or your muma but would prefer it if you bought [sic] a youth and plenty of food should be a great night so see you there six o’clock”.

However, one recipient – his wife Faye – received a message that read “bring a date or your muma but would prefer it if you bought me she setting a bad example for me”.

Mr Molen, of Newtown, contacted Telecom’s call centre and was told he wasn’t the first to experience the problem. “[The call centre worker] said it was a software fault that adds lines to the last part of people’s texts … and there had even been swear words added on to some messages.

I had my own text problems this week. Had played a round of phone tag with a new client and left a voice mail message for them at around 2 pm.

At around half past midnight my Blackberry beeped. I was in bed but still awake, so leaned over to check it. It was the client asking if it was too late for them to call me now. My initial thoughts were unprintable, and I resisted replying at the time.

I then talked to the client this morning and gently inquired what time did they send a text to me yesterday. As I suspected it was not at half past midnight – it was at 5.30 pm, and it took seven hours to reach me. The client was somewhat mortified (it wasn’t their fault) and was extremely grateful I didn’t phone back at the time I received it 🙂

It would be really useful if text messages were like e-mails, and had both a time sent and time received stamp.

Not a smart call

May 4th, 2010 at 10:00 am by David Farrar

The Dom Post reports:

Telecom landline customers face a steep rise in the cost of off-peak national calls from next month.

The company is increasing the cost of calls by more than 25 per cent from 19 cents a minute to 24c. …

The company’s toll call revenues have been falling more steeply than any other major part of its business as more customers use internet phone services such as Skype, discount calling cards on sale at dairies, and a recent spate of cheap mobile offers for both overseas and national calls. …

Slingshot, the third biggest residential phone provider, has peak and off-peak national toll calls for 8 cents a minute.

Hmmn you’re losing money because customers are using cheaper services such as Skype, calling cards or competing toll providers.

So your response is to put prices up, so even fewer customers will use you!

Telecom’s woes

April 16th, 2010 at 5:39 am by David Farrar

The Herald reports:

Telecom plans to slash 200 management jobs by mid-year, and more lay-offs are likely as the company seeks to slash its costs.

Never good when a company cuts jobs, but often necessary. Very tough on those in the affected areas.

The job losses within its 8000-person workforce are part of a programme announced last year that aims to slice more than $500 million from the business’s costs by 2013.

Mr Reynolds said $113 million had been cut last year, and a further $244 million was expected to be cut this financial year.

200 out of 8,000 is 1 in 40 jobs gone, but as they are all management jobs, then the ratio will be considerably lower.

In a related story:

Telecom is seeking relief from the Government on its regulatory obligations in the face of pressure on earnings.

I’m somewhat supportive of this, but the key is timing. As a fibre network is built, access to the copper legacy network will become less important, and access conditions can be reduced. But one needs that fibre network to be reasonably progressed, before one can start to strip back some of the copper network regulation.


Tom Pullar-Strecker writes in the Dom Post:

Telecom has caved in to Government pressure and will consider splitting into two separate companies.

This would make it more likely that the Government’s $1.5 billion plan to roll out ultrafast broadband to three-quarters of homes will get off the ground.

I’m not sure it makes the fibre to the home plan more likely. I think it makes Telecom’s chances of winning the bids more likely.

After playing chicken with the Government over the ultrafast broadband contract, chief executive Paul Reynolds blinked first and said the company was open to working with the Government on a “full range of approaches”.

I’m not sure I quite read that as saying they will consider splitting. If Telecom is open to spinning Chorus off (which would be a good thing), they should make it clear, as it will improve their chances (in my opinion) with the fibre to the home initiative.

The mobile termination rates decision

March 11th, 2010 at 3:00 pm by David Farrar

Labour yesterday announced a formal position on mobile termination rates:

The Government should put consumers first and regulate mobile termination rates to keep call costs down, Labour spokesperson for communications and IT Clare Curran said today.

“High mobile termination rates are a barrier to entry for new players in the market, which leads to less competition and higher prices,” Clare Curran said.

“While Vodafone and Telecom have now offered to lower termination rates by around 80 per cent, it still does not go far enough to reduce the major issues for new entrants.

I think it is a good thing that Labour have learnt from their mistakes, when they did a deal with the two telcos in 2007, rather than accept the advice to regulate.

Slightly amused that their formal policy stance comes just days after Clare had a whack at Matthew Hooton for implying Labour support the Drop the Rate, Mate campaign.

The Drop the Rate, Mate campaign also yesterday released their submission to the Minister, including some research done by Curia of 400 mobile phone users. Key findings were:

  • Only 18% of respondents wanted the Government to accept the binding promises of Telecom and Vodafone, while 78% wanted the Government to regulate
  • 79% agreed that Telecom and Vodafone are overcharging New Zealanders
  • 85% agreed with the proposition that it should cost the same to call someone on a different network, as to call someone on your own network


Chris Barton in the Herald is not shy with his opinion of what the Government should do:

So far, you have to say, Joyce has played with an exceedingly straight bat. But it won’t be easy negotiating the quagmire of a split recommendation by Commerce Commissioners on mobile termination rates. Two argue for putting heads in the sand while one voice of reason says enough is enough – Vodafone and Telecom have had more than enough time to sort this out and have, time and again, shown they can’t be trusted.

Joyce will be familiar with the sordid last-minute deal stitched together between new mobile entrant 2degrees and Vodafone last year. While the public isn’t allowed to know about this venality, anyone who cares to can find it online (search under “NZ Cellphone racket”). It shows that Vodafone will move if it has a gun to its head. Joyce will also be familiar with and – two campaigning websites where the public is helping the minister make up his mind.

Go there at once.

What fed-up consumers want minister, is Clint Eastwood’s Dirty Harry. For some of us, it’s so bad, we don’t just want Clint to pull out his .44 Magnum and ask whether the punk feels lucky. With Telecom and Vodafone, we want him to pull the trigger.

The challenge for the Minister, is how quickly can a regulated price be established, if he chooses to regulate. The undertakings would take place more quickly. However the likely regulated price would see prices by 2011 drop further, and remain lower.

Gattung speaks up

March 5th, 2010 at 10:09 am by David Farrar

The Herald reports:

Former Telecom head Theresa Gattung has attacked the company for paying its executives much bigger salaries than when she was in charge.

In her book Bird on a Wire, which goes on sale next week, Ms Gattung – who received a leaving payment of $3.9 million in June 2007 on top of a base salary of $1.25m – questions whether the current staff deserve such generous pay.

“Now that I’m long gone I, with the rest of the country, wonder about the propriety of a company making half the annual profits it did a few years ago but paying its executives considerably higher salaries.”

It’s a fair question, but there may also be a fair answer. One reason profits have dropped is because the Government has operationally separated Telecom to stamp out business practices which were anti-competitive. The reason the Government did this is because it got so frustrated with the behaviour of Telecom under Theresa’s regime.

Ms Gattung told the Herald politicians deserved much of the blame for Telecom’s latest woes.

She said she predicted in 2007 that the Labour Government’s decision to give competitors access to Telecom’s exchanges, and to split the company into three divisions, would result in a “train wreck”.

Telecom may be struggling (for a number of reasons), but the sector as a whole is actually doing very well. The train wreck for me was the previous status quo.

In her book, Ms Gattung also reveals that former Labour Party president Mike Williams approached her shortly before she left Telecom to stand for Labour.

She says she was “flabbergasted”.

Now that would have been interesting.

Vodafone moves in

February 27th, 2010 at 8:35 am by David Farrar

The Herald reports:

Vodafone will today announce a fresh offensive to capitalise on Telecom’s ongoing woes.

Paul Brislen, Vodafone spokesman, said the company would refund any Telecom customers penalised for switching mobile phone providers.

Under the deal to be announced this morning, angry Telecom customers can change to Vodafone and keep the same phone number – and be credited the amount they are charged for breaking their contract.

That amount varies but in one case, Mr Brislen said, a customer had to pay $1500 to leave Telecom.

The aggressive attempt to snatch business and consumer customers comes as Telecom faced more problems yesterday.

The cost of these outages to Telecom must be well into the tens of millions of dollars when you consider the compensation, the lost customers, the scaring off of future customers, the damage to Telecom’s reputation which may affect stuff such as the fibre to the home rollout etc etc.

I speculated on radio yesterday that while the focus for now is on fixing the faults, and not finger pointing, there must be a reasonable chance in the future of a law suit between Telecom and Alcatel-Lucent. Obviously it all depends on the contractual arrangements, but when companies lose so much money due to technical failures, there tend to be fallout.

How big could any lawsuit be? I don’t think one could rule out $100 million or so.

Editorials 25 February 2010

February 25th, 2010 at 2:29 pm by David Farrar

The Herald editorial is on mobile termination rates:

New Zealand’s “light-handed” regulation of markets is sometimes astonishingly tolerant. Never more so than in the long-awaited final report of the Commerce Commission on the amount telephone companies charge for admission to their mobile networks. …

But the commission’s majority view is probably the right one. Regulators have to be fair to suppliers as well as customers and potential competitors. Networks are costly to build and maintain and newcomers that want to sell services into them must expect to pay a fair price. The price must maintain the network owner’s incentive to invest in it.

Clearly, the termination rates in this country were much higher than they needed to be to maintain the investment. Telecom and Vodafone have been using them to subsidise their subscribers and protect their equal market shares.

But their latest undertakings will more than halve their charges by 2014 and give a newcomer a fighting chance. Their undertakings can be policed by keeping the regulatory alternative in reserve.

Heavy-handed regulation usually has unintended consequences that are not in the interests of competition or consumers. Persistent shepherding and constant monitoring are best.

So the Herald favours giving the benefit of the doubt to the telcos. As I said previously, a tough decision for Steven Joyce.

The Press focuses on what it calls the XT debacle:

When members of the public dial 111 they have the legitimate expectation that their call will be answered promptly and emergency services quickly dispatched.

But on Monday, when a Christchurch man attempted to alert the police to an attack on a Japanese man outside a suburban mall by four skinhead thugs, who were accompanied by two pitbull dogs, the failure of Telecom’s troubled XT cellphone network prevented him from doing so. …

It is utterly unacceptable that its much-vaunted $574 million XT network, which lured customers to join with claims that it was state-of-the-art technology, could have failed four times in recent months. On one occasion some customers were cut off from XT for three days. …

But it is even more serious that in parts of the country, including Christchurch, a switching process which is supposed to have allowed XT phones to use other networks did not work and, as a result, 111 calls could not be made.

The unavailability of the 111 number could create dangerous situations. It means that crimes, accidents and fires could not be reported to emergency services, unless a landline was within immediate access, and conceivably lives could be put at risk by the problem.

If the faults with the XT network cannot be swiftly resolved, and there is no guarantee that this will occur, the Government will have little choice but to regulate to ensure that 111 calls can get through when networks become unstable.

The failure of 111 calls is the most serious aspect.

The Dom Post also focuses on XT:

If you believe the ads, Telecom’s new XT network provides unmatchable cellphone service in the Mt Victoria Tunnel, on remote farm tracks and in shipping containers floating off the coast of the North Island.

Sadly, its record is not so good in living rooms and city streets. The technical fault that prevented 220,000 Telecom customers from making calls on Monday was the fourth major outage in the past 10 weeks. It is not often that an advertising campaign blows up so spectacularly. …

In the wake of the latest outage, there have been calls for the Government to further regulate the industry.

That isn’t necessary, although ministers would be wise to bear in mind the gap between Telecom’s rhetoric and performance when they consider the phone company’s offer to host the Government’s proposed $1.5 billion ultra-fast broadband network. This is an occasion on which the market is actually working. There are two other mobile network providers in New Zealand – Vodafone and 2degrees – and mobile phone users have options.

The fibre to the home network build is significant. I have never thought Telecom would get to win the tender in all 33 regions, but if they failed to win any region, it might lead to a perception of unfairness. However it is a political reality, that these XT outages makes it less of an issue if Telecom do not get any major aspects of the FTTH rollout.

The ODT editorial is on ministerial credit cards:

Credit cards and politicians go together like oil and water: which is why there will be much gnashing of teeth at the latest folly concerning our Parliamentarians and their inability to follow the most simple of rules relating to expenditure.

The present matter involves ministerial credit cards, a facility granted to MPs of such rank, to give them access to money should they be required to spend it in the course of their official duties. …

In this context, Housing Minister Phil Heatley must have used up about as much rope as Mr Key will lay out to him. …

For his part, Mr Key may need, sooner rather than later, to put away his smiling Mr Reasonable personage and show at least a glimmer of the inner steel that all successful leaders must possess.

Anyone who thinks the PM doesn’t have inner steel, will not enjoy finding out that they are wrong.

Trade Me auction of an XT phone

February 23rd, 2010 at 3:30 pm by David Farrar

Someone has listed this phone on Trade Me as a Telecom XT mobile phone 🙂

As always, the Q+A are quite hilarious.

XT. Telecom and the Govt

February 23rd, 2010 at 5:00 am by David Farrar

I tweeted last night that I felt very sorry for the many Telecom staff, as their XT network suffered another outage. It must be galling to see the company you work for get so damaged by outages that cause so much disruption. It’s probably like working for National in Parliament in 2002, which is why I can empathise!

A friend responded:

sorry David, but this chicken has been waiting to come home to roost for a while…you can’t outsource your maintenance, technology, customer service etc and expect to retain the core that makes a company strong enough not to fall into this sort of morass

And that’s a fair point. I recall one ex Telecom staffer semi-joking to me that I had to understand that Telecom wasn’t an IT company, it was a law firm that had contractors provide telecommunication services 🙂

Now Ernie Newman at TUANZ has called for possible Government action:

“Telecom needs to do something drastic to assist the customers it is repeatedly letting down,” said chief executive Ernie Newman in a statement.

“If it doesn’t, then it may be time for the government to step in as a national economic issue. This cannot be allowed to go on”

My first response to the call for Government action is to imagine Steven Joyce in builders shorts and a hard hat on a tall ladder at the top of a mobile phone tower, and he’s whacking something repeatedly with a spanner.

More seriously, I don’t see these outages as critical as if they had occured on the fixed line network, or the DSL network.

Telecom has a near monopoly on the final mile copper loop. If those networks go down, it can affect everyone in NZ, regardless of choice of provider.

But we have two and a half mobile phone networks in NZ, which are not dependent on the same infrastructure, and one can establish a presence on a competitor within a few hours, plus have number portability to keep numbers.

I’m not advocating that XT customers mass migrate – individual customers will make those decisions based on how many more outages there are, and what guarantees and/or compensation they get in future. But the presence of Vodafone and 2 Degrees means that customers do have options, if the frustration gets too much for them. And that knowledge that they may lose current and future customers will be providing the best incentive to Telecom (and its contractors) to get things right.

So I’d rather the Government doesn’t jump in at this stage. I’d have a different view if the outages were in one of the areas where they are a virtual monopoly, but this is not the case with the XT mobile network.

$100 a minute

February 14th, 2010 at 11:15 am by David Farrar

The HoS reports:

A kiwi salesman was stunned to receive a $1100 bill from Telecom for just 10 minutes of internet access from his laptop.

Michael Crake racked up the charges after using a computer fitted with a mobile broadband device while at Sydney airport.

Oh dear. He got clobbered with the outrageous $30 a MB that Telecom and Vodafone extort from users who roam overseas.

The price charged is massively higher than that faced by users from many other countries that roam. It has zero resemblance to actual costs.

But putting that aside, my bigger gripe is that the telcos do not do enough to inform people of this charge.

When you roam overseas it should flash up a huge warning that tells you what the cost will be on that network, and require you to confirm that you understand the price and accept it.

Cellphone tower sharing

January 25th, 2010 at 11:25 am by David Farrar

The Dom Post reports:

The Commerce Commission has opened the door to mobile phone companies sharing a 4G mobile network, saying it would be willing to engage in “appropriate discussions” on issues that may be relevant to network sharing.

Telecommunications Industry Group chief executive Rob Spray suggested in December that Vodafone, Telecom and 2degrees could build a 4G network using shared cellphone towers and radio spectrum that they jointly owned, to avoid a proliferation of cellphone towers.

2degrees chief executive Eric Hertz expressed support for the idea, while Telecom said it was open to it in principle. However, Vodafone feared that any move to a single mobile network might fall foul of competition law.

A commission spokesperson says the Commerce Act does not bar such arrangements, except where they might greatly lessen competition.

I think it is very sensible to avoid duplication in infrastructure for mobile phones. The competition should come in services and applications.

In fact an idea which has occured to me, is that regional fibre companies could be tasked with responsiblity for future cellphone towers in their areas. My rationale is:

  • RFCs are set up to provide infrastructure to telcos and ISPs
  • RFCs are not allowed to be majority owned by a telco that provides services or applications
  • As more of the Internet goes over the mobile network, you need better backhaul from cellphone towers, so who better than the local fibre company
  • The telcos might even consider selling their existing cellphone towers to RFCs

Of course at this stage we don’t have any RFCs yet, but once they are established it may well be a conversation worth happening.

Telecom gets competitive

November 12th, 2009 at 12:00 pm by David Farrar

Chris Barton writes:

I generally don’t like unsolicited strangers at my front door trying to sell me stuff.

So when the young guy turned up last week I adopted my usual, somewhat abrupt, I’m-not-buying-anything-from-you manner.

“Hello, I’m from Telecom and just wanted to ask whether you’re happy with your broadband and phone service?” …

But because I may have just witnessed a landmark event in telecommunications history – the first occasion in my lifetime that Telecom has actually touted for my business.

The slothful corporate has always assumed my business was its monopoly right. Has competition finally arrived?

I think that is a positive sign. May it continue.

Telecom’s new logo

October 17th, 2009 at 9:58 am by David Farrar


The Herald writes about Telecom’s new logo, and the debate about whether it is a snowflake, or a spark.

The best suggestion I have seen was on Twitter, where someone suggested it represents the small print in the contracts, which is normally denoted by an asterisk 🙂

To be fair, I do prefer the new logo to the old one, which was very dull and corporate.

Mobile termination rates

October 5th, 2009 at 12:00 pm by David Farrar

As usual, Chris Keall has the best summary of what the offers are on mobile termination rates:

Commerce Commission proposal
Voice calls: immediate halving of MTR on voice calls from 14 cents to 7.5 cents. Glide path to 3.8 cents by 2015.
Txt: immediate cut from 10 cents to 3.8 cents. Further cuts to 0.5 cents by 2015.

Voice: Looking to head off regulation with offer to cut MTR on voice calls to 12 cents per minute from April 2010, with glide path down to 73 cents a minute by 2015.
Txt: 1.2 cents from April 2010.

Voice: cut to 12 cents per minute from January 2010. Glide path down to 7 cents per minute by 2015.
Txt: no offer
Expresses support for bill-and-keep, an alternative to MTR that sees the a phone company whose network initiates a call pay all costs.

Wants MTR scrapped on all voice calls and txt. Prefers bill-and-keep model (initiating caller’s telco pays all cost). If that’s not possible favours immediate drop to 6.54 cents per minute for voice, falling to 3.45 cents by 2015.

So let us look at voice calls first. In 2010 the rate would be 7.5c under the Commerce Commission proposal, 12c offered by Vodafone, and 12c offered by Telecom.

By 2015, the rate would be 3.8c under the Commerce Commission proposal, 73c offered by Vodafone, and 7c offered by Telecom.

For text messages in 2010 the rate would be 3.8c under the Commerce Commission proposal, 1.2c offered by Vodafone, and 10c offered by Telecom.

By 2015, the rate would be 0.5c under the Commerce Commission proposal, 1.2c offered by Vodafone, and 10c offered by Telecom.

It is good to see Vodafone offering a more tempting package, with the huge drop in termination rates for text messages.

Also interesting to note:

Telecom’s numbers are close to those of its previous submission. More noteably, the telco has also expressed support for bill-and-keep – an alternative to MTR in the US and elsewhere that sees the phone company that initiates a call paying all costs.

I don’t think that is explained right. With bill and keep there is effectively a zero interconnect fee or termination rate. It is pleasing to see Telecom moot that. I think it is a superior model.

Think how retarded the Internet would be if ISPs charged each other 10c an e-mail?

Also pleasing has been that the Minister has ruled out any last minute negotiations with telcos on the proposed regulation. Trevor Mallard fell into this trap of privately negotiating a deal. Steven Joyce has said that any commercial offers have to go to the Commerce Commission, not him. And then once the Commerce Commission makes a recommendation, he will either accept it or not accept it – but won’t get into a game of considering ever increasing (or decreasing) commercial offers every few days.

It will be interesting to see what the final Commerce Commission recommendation will be.

Note that my company has done some market research for Exceltium Ltd on the issue of mobile termination rates, but all views are my own.

TSO changes overdue

October 1st, 2009 at 9:00 am by David Farrar

I doubt there has ever been a better (or worse) case of unforeseen consequences that the former Telecom Kiwishare, now known as the Telecommunications Service Obligation.

It had the best of motivations – to protect rural New Zealanders whose phone lines could be deemed uneconomic by requiring Telecom to still provide them with flat rate local calling at at an inflation adjusted price cap.

The first failure has been the price cap. The cost of telecommunications has dropped massively over two decades. But guess what happens if you have a law that says Telecom can increase line rentals by no more than the rate of inflation. Well not only do they not drop prices, almost every year without fail they increase line rentals by the rate of inflation. A price cap becomes a price target.

The second failure was its effect on competition. It not only kept competitors from offering services to rural NZ, it made them fund Telecom for its so called “uneconomic” customers. Tens of millions of dollars went from struggling competitors into Telecom.

So after years of discussion, we’ve finally had decisions to make changes, by Steven Joyce. They are:

Currently Telecom receives approximately $70 million per annum largely to compensate it for supplying local service to rural customers.  This money is sourced from the industry via the TSO levy which is paid by market participants (including Telecom which contributes approximately 70%) on a market share basis.

Mr Joyce says he is concerned by the lack of transparency around where this money is spent and whether rural customers are benefiting from it.

“The existing TSO levy has been in place since 2001 and has been a source of considerable controversy within the industry. A recent review of the TSO had identified that the current methodology for assessing how much the TSO commitment was costing Telecom a year was flawed.

The current TSO levy methodology counts the costs Telecom incurs but does not include the full range of benefits Telecom derives from the TSO.

The government is proposing to change the methodology for how much Telecom is compensated for uneconomic customers.  By counting both the costs and the benefits of the TSO it is likely that the TSO levy will reduce to zero for the foreseeable future.”

The non inclusion of benefits was a cause of considerable angst for the competitors who paid $21 million a year to Telecom. This decision has near universal support.

However the telcos are not getting to keep all the money they used to pay:

“We’re proposing to fund the $300 million rural initiative through a combination of direct government funding and revenue from a more transparent and effective industry levy than the current TSO levy.”

The government will provide a direct contribution of $48 million and further interim funding of up to $52 million.  The remaining funding will be sourced by replacing the existing TSO industry funding with a more transparent contestable industry-wide mechanism that focuses on developing rural telecommunications.

The new telecommunications development levy to replace the TSO levy would look to recover around $50 million per annum over the next six years – about $20 million less than is currently the case.

“When the government tenders for the provision of rural broadband it will be an open and competitive process, with full transparency on where the money is spent,” says Mr Joyce.

So around 70% of the old levy will still be collected, and used to fund rural broadband. This part is less than popular with the telcos, but very popular with Federated Farmers.

A more purist model would be to have the Government fund rural broadband development directly (if one accepts there is an economic gain in doing so), but the model announces is quite cunning because competing telcos are still pretty happy to be funding $15 million a year to a fund which is contestable and will actually increase broadband infrastructure, than $21 million a year to Telecom merely to maintain the status quo.

Telecom of course does not do so well as it used to collect $21 million for doing basically nothing, and paid $49 million to itself for the same thing. It will now pay around $35 million to the Government for the contestable fund. Some consolation to Telecom, is that they are in the best position to win most of the tenders for using the funds.

The Herald reports:

Vodafone chief executive Russell Stanners said it was time for reform of the TSO.

“The TSO regulation was introduced with the best intentions but has become a millstone around the neck of the industry.”

Telecom said it had been part of an industry-wide push to secure reform of TSO arrangements.

“This reform is long overdue and needs to be based on principles of contestability, transparency and technology neutrality,” Telecom chief executive Paul Reynolds said.

“It is equally important that any subsidies applied to fund services to uneconomic customers are borne equally by all consumers, and not just Telecom’s.”

Federated Farmers welcomed the plan but said it was approaching it cautiously until more details were known.

Pretty much everyone agreed on the need for reform, and most will say this is going in the right direction.

The Telecommunications Industry Group (TIG) said the plan amounted to a $252 million industry tax.

“The Government has just replaced one form of taxation with another, in an industry where prices are dropping, margins are tight and customer expectations are increasing,” said TIG chief executive Rob Spray.

They are right, except of course it is replacing what was an even higher $350 million industry tax. It is a move in the right direction with both a dropping of the amount levied, and a change in what it is used for.

Economist blog Progressive Turmoil, blogs favourably on the decision, and has a neat little graph too.

Options for Telecom

September 21st, 2009 at 11:00 am by David Farrar

In light of the Government’s fibre to the home proposal, there seem to be three distinct paths forward for Telecom. They are:

Structural Separation

If Chorus is sold off, then Chorus would be in a very strong position to effectively gain most of the $1.5 billion on offer, by partnering with the Government to set up many of the regional fibre companies – or even one national fibre company.

The likely sucess in gaining most of the $1.5 billion would increase the value Telecom would get by selling Chorus. Also Telecom might not have to sell all its shareholding in Chorus – it could, I beleive, still retain a minority stake as an investment.

This would leave Telecom with its wholesale and retail arms. They would probably immediately have most of the current obligations imposed on them, such as equivalence, dropped.

With much reduced capital expenditure needs, and a cash inflow from the sale, Telecom should be in a position to increase the dividends it pays.

The downside will the inability to leverage the advantages of also owning the existing infrastructure. They’ll be paying an outside company to utilise their lines – the same as everyone currently has to do to Telecom. They will also be more at the whim of the market. If they lose market share to competitors, they won’t have the compensation of the fact the competitors are still paying them access fees.

Infrastructure companies tend to be safer, but have lower dividend returns. Competitive companies are a more risky investment, but can produce higher returns.

Participate as a minority partner

If Telecom do not structurally separate, then they are deemed a “partner” that owns a retail operation. This does not preclude them in any way from full participation in one or more local fibre companies (or even to still propose they be a partner in a national fibre company).

The key restriction is that will not have the right to appoint a majority of Directors to the Board of the LFC, and the Chair of the LFC Board must be agreed unanimously by all shareholders.

I’m not sure how important control of the Board of an LFC will be to Telecom. The initial partnership agreement with CFH setting out terms of investment and how extensive a fibre build will be is arguably the more important factor.

It is quite possible Telecom could decide to participate and invest in one or more LFCs. This will also help protect their investment in current legacy assets.

Do not participate

The third option is for Telecom not to bid to be a partner for any LFCs, or they do bid and are unsuccessful.

If this is the path chosen, then Telecom will be in a fairly strong position to ask for some of the current requirements imposed by operational separation to be removed. There would be issues over timing, of course.

It is likely Telecom would not undertake any more major infrastructure investment (such as further cabinetisation or further upgrades to VDSL2) beyond their current commitment of $1.4 billion. This would save them money in the short term, and in the long term they would become a customer of the LFCs for their higher speed products.

Telecom could do quite well relieved of the need to keep rolling out faster and nearer infrastructure. For many of their customers, the current speeds will be adequate for some time.

It is possible that they might keep up an aggressive investment programme to try and compete with the local fibre companies, and even drive them out of business. That would be a very ballsy call though, considering the firm policy of both major political parties is that the future fibre infrastructure must be open access and not part of a vertically integrated monopoly.

Telecom’s decision is going to be one of those really big ones – on much the same scale as which mobile phone technology to go with. The wrong call can cost a lot of money. The senior staff and board have an unenviable task looking at their company, considering its strengths and weaknesses, and deciding on the best path forward.

Telecom and TiVo

September 21st, 2009 at 5:53 am by David Farrar

The Herald has some details of the deal:

  • TiVo is launching in early November.
  • Telecom will take an unspecified share of the $899 cost for a set top box and offer its customers free broadband for downloads of movies and unspecified free advertising-funded content.
  • It will take no share of TiVo’s income from pay per view movies so income will dry up while it has an ongoing cost for free broadband for TiVo content.
  • Telecom says it owes consumers more details of the TiVo offer before they pay $899 for a set top box.
  • It would not disfranchise customers, though would not rule out changes.

I think this is a very smart move by Telecom. While I am a very happy MySky customer, I understand TiVo is even more advanced in terms of functionality. And the ability to legally download movies on demand is the future.