The case for fresh Telecommunications Service Obligation thinking

You don’t hear much talk about the Telecommunications Service Obligation these days: The problems the TSO set out to address appear to have been solved.

The original idea of a TSO was that everyone in New Zealand should have access to basic communications services at an affordable price. It set a low bar. At first it meant nothing more than being able to make a local voice telephone call.

Privatisation

A TSO became necessary when Telecom was privatised more than 30 years ago.

Before privatisation the phone network was state-owned. It was run as a public service by the Post Office.

The Post Office network was far from perfect. Even so it reached into every corner of the nation. People in far-flung communities paid the same price and received the same service as people in the big cities.

You might find a telephone box in a remote location and, in return for a few coins, you could phone anywhere in New Zealand. With more coins you could phone almost anywhere in the world.

Subsidy

As you might expect, in practice this meant city folk subsidised their rural cousins. Nobody complained about this at the time. It seemed fair and it helped build a sense of nationhood.

Privatisation threatened that. The company managing the phone network and providing services now had to make a profit and earn dividends for investors.

Left to market forces that could mean making rural customers pay higher prices reflecting the higher costs of providing their service. It might even mean abandoning less lucrative customers.

Hence the TSO. There was a similar, separate obligation for the telephone company to provide a text relay service for the deaf.

Competition

Things became more complicated when new competitors entered the market. Apart from anything else, having an incumbent subside some users at the expense of others could see the newcomers cherry pick the lucrative, easily served markets and ignore the expensive to satisfy rural customers.

In 2011, Chorus separated from Telecom in a deal with the government that gave the company contracts to build parts of the fibre network.

At the time, the government rewrote the TSO rules to reflect the conditions of a new fibre telecommunications era.

Rules

The new rules included the idea that Telecom, now known as Spark, could never raise the price of a basic home phone connection faster than the general rate of inflation. There was a get-out clause to cope with unforeseen financial implications, the government didn’t want the TSO to send Telecom broke.

A second rule was that rural customers would pay the same as urban customers for basic phone services. This is despite it costing considerably more to maintain a rural network.

Other rules at that time meant Telecom would have to continue offering fixed-line services to existing customers and that local calling would remain ‘free’ for residential users. It wasn’t actually free, but that’s another story.

There was also a requirement for Telecom to offer a basic dial-up internet service.

Anachronistic?

Under the TSO, Chorus had to agree to maintain its copper network so that Telecom could meet its obligations.

Much of this looks anachronistic in 2024.

Spark is in the process of wrapping up its PSTN, in effect the old copper voice and data network. Chorus is withdrawing copper in fibre areas and will pull the plug everywhere within a decade.

TSO ideas remain valid

TSO ideas live on in the fibre world. The price of a fibre connection is the same throughout the country even though it costs more to install and maintain the network in rural areas.

The per customer cost of the fibre connections serving Milford Sound will be many times the cost of providing fibre to Lower Hutt.

Wholesale fibre prices remain heavily regulated despite the arrival of competing technologies.

The text relay service for the deaf which is part of the TSO remains important, but affordable AI speech-to-text services mean that may not be essential for ever.

Monopolies

Much of the thinking behind the original TSO was to do with what was previously a state-owned monopoly. While the market is fully open now, fixed-line services can still be monopolistic in parts of the country.

That’s hardly an issue today. Competition abounds. Urban consumers can buy broadband from dozens of service providers. There are three, four if you count Skinny as separate, big fixed wireless providers.

It’s less competitive outside the main centres, but there are few places where there is no choice. There are regional wireless internet service providers and Starlink. At least two other LEO satellite services are likely to begin operation over the next 24 months.

Redundant

Which means the idea of a TSO as we know it is redundant. Anyone, anywhere in New Zealand can, in theory, buy an affordable, decent quality broadband connection.

Yet that doesn’t necessarily mean all the TSO problems are solved.

Satellite networks can and do run into capacity problems. At times Starlink has stopped taking on extra customers in some markets. That issue will go away as more satellite networks come online and existing networks launch more satellites.

Vulnerabilities

More worrying is the vulnerability of depending on a handful of foreign owned corporations for essential services. New Zealand has no control over the satellite networks. We don’t even have a seat at the table.

You could argue Starlink’s deprioritised plan is predatory pricing. That it could wipe out wisps and carrier-owned fixed wireless networks. Once they’re gone, customers will be left without alternatives and prices can rise at Starlink’s whim.

Bang goes the idea of every New Zealander having affordable communications.

Government and its agencies would be powerless to stop this.

Satellite competition

Of course it hasn’t happened yet and it may never happen. The arrival of other satellite networks should provide the competitive pressure to ensure this is not our future.

Yet, a look at this plausible but unlikely future turn of events tells us we can’t be complacent. Which brings us to the need for fresh Telecommunications Service Obligation thinking.

New Zealand can’t afford To launch its own LEO satellite network, but it can afford to extend terrestrial networks to reach every part of the country.

Finish the fast network job

That would be the best, the most reliable and safest way of ensuring every New Zealander continues to have access to affordable communications.

These networks could be fibre. There’s definitely a case for more open access fibre. The new networks could be fixed wireless, which is the best technology for filling in the gaps. They could be operated by wisps or by the big three mobile carriers.

Our current government has signalled that, in general, it isn’t interested in funding further network extensions. However, some Regional Infrastructure Fund money may yet be spent this way.

Raise the funds

Otherwise, there’s a case for an increase in the Telecommunications Development Levy and using that money. We could explore extending the TDL beyond telcos. At some point Starlink will contribute.

Subsidising and investing in New Zealand’s wisps would deliver the maximum benefit for the lowest cost, but they don’t cover every region and are not the only option. Everything should stay on the table.

Either way, the goal should be to make sure the need for a TSO remains redundant. That’s going to require fresh thinking from government, from government agencies and from the industry.