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IRD inland revenue department tax

At Computerworld James Henderson reports: Spark seals $60 million IRD contract as Revera overhauls tax system.

The headline tells the story in 11 tight words. Nice work.

Next comes what old school journalists call the second deck: 

We are delighted that the data centre’s contract has been awarded to a New Zealand company.

It is a direct quote from the Inland Revenue Department’s deputy commissioner Greg James.

A government department buying IT services from a New Zealand company shouldn’t be remarkable.

But it is.

I sometimes wonder if New Zealand government departments are allergic to home grown technology.

If this was Australia, the USA or the UK, government would be under pressure to buy from local suppliers. Listen to what candidates in the US presidential primaries say on the subject.

It’s a vote winner. It should be here.

Yet at times it feels as if the political pressure in New Zealand is in the opposite direction.

This isn’t about protectionism. After all, we’re a free trade economy. Yet it often feels as if government is biased against local tech companies.

We have world class tech companies. Spark Digital is least as good as its overseas owned competition. So is Revera. So are the other top tier local IT companies.

They don’t need favouritism. Give them a fair crack at contracts and you’ll find you get better service from professionals well acquainted with local conditions. You’ll create more, high-quality jobs and keep more local talent at home.

I’d be delighted with that.

 

 

HD Voice vodafone NZ

Spark, Vodafone and Chorus will pay almost NZ$44 million towards this year’s $50 million Telecommunications Development Levy.

The Telecommunications Development Levy is an extra tax paid by telecommunications companies. Each company pays a little over one percent of its revenue to subsidise rural broadband and finance other worthy but uncommercial services.

Spark is the biggest contributor. It pays almost $20 million. Vodafone pays almost $14 million and Chorus’ share is around $11 million.

The next two telecommunications companies, 2degrees and CallPlus pay around $3 million and $1.2 million. There are 13 other companies paying the tax. Between them, they pay about $2 million.

Companies have to earn at least $10 million from “telecommunications services” before paying anything.

Government set the Telecommunications Development Levy fund at NZ$50 million. Each of the contributing companies pays a proportion of the total depending on its share of all “qualifying revenue”.

Some of the money raised, NZ$2.6 million this year, pays for the Telecommunications Relay Service. This helps people with hearing problems use telephones.

The government sets a further sum aside for 111 emergency services. It spends the rest of the money on rural broadband.

A tax by any other name

Note how government charges the Telecommunications Development Levy on revenue, not profit.

That would be difficult because as a whole New Zealand’s telecommunications industry barely scrapes a profit.

Last year the five companies paying the lion’s share of the levy made a collective loss. This year the numbers are better, but not much.

Telecommunications is not a high-margin business and requires huge capital investment in infrastructure. Not least in paying the government to use the radio spectrum — which could be regarded as another form of taxation.

In practice companies pass the extra taxes on to telecommunications customers.

Free riders

There’s an irony here. While telecommunications companies pay extra tax, the companies, one might argue benefit the most from a nationwide broadband network, barely pay any tax.

Google and Facebook earn a king’s ransom selling ads to New Zealanders. Because they claim these sales happen elsewhere in the world the revenue they collect is effectively tax-free.

They wouldn’t be able to earn this tax-free income if it wasn’t for the likes of Spark, Vodafone, Chorus, 2degrees or CallPlus providing the networks. They get a free ride.

According to the IAB industry spent some NZ$200 million on interactive advertising in the third quarter of 2015. I

Even if the government can’t force these companies to pay their fair share of company tax, perhaps it could include their revenue in the Telecommunications Development Levy.

Vodafone NZ

New Zealand telecommunications went from state-owned to a competitive market in a generation.

Now the government is back in the telecoms business. Not as a direct player, but sponsoring and calling the shots for a national urban fibre roll out.

Government also imposed an extra tax on telcos to pay for rural service upgrades. It restructured the industry to get the ball rolling on its Ultra-fast broadband project. Telecom NZ had to spin-off Chorus, its network division, or miss out on fibre contracts.

From Telecom NZ to Spark

The restructure forced Telecom NZ to change its strategy and to find new markets. It also found a new name: Spark.

Vodafone went through its own changes adjusting to the new market conditions.

Now New Zealand’s two telecommunications giants are moving in different directions.

By changing it name from Telecom NZ to Spark, the company underlined its transformation. It is no longer the telephone company. Today Spark sells a broad variety of digital services.

Vodafone changes tack

Meanwhile, Vodafone acquired Telstra-Clear and pushed into business and rural markets.

Change was always going to happen with or without direct government intervention.

Competition between carriers means profit margins have fallen. Regulation and, in New Zealand, extra taxes like the Telecommunications Development Levy eat further into already slim margins.

Then there are new external competitors. Over-the-top services like Google, Skype and Apple offer free or low-cost products. They compete with toll calls and other once-lucrative sources of revenue.

It means an end to healthy profits from tolls, SMS and other value-added services.

Dumb pipes

Today the core business at Spark and Vodafone is selling dumb pipes. These can be through the air or through landlines. They sometimes speak of “selling bits”, which amounts to the same thing.

Whether you call it dumb pipes or bits, telecommunications is now a commodity business. Two Spark subsidiaries illustrate this. Big Pipe sells broadband, Skinny sells mobile phone services. They are bare-bones, low-cost alternatives. They offer a shorter menu of options and less customer hand-holding.

It is difficult to differentiate core telecommunications services. To the user voice calls look, or rather sound, much the same no matter how they arrive. Few consumers could tell the difference if a different broadband provider delivered their data.

700 MHz of difference

There are points of difference. Spark invested in an extra slice of 700 MHz spectrum. That will give it an edge with faster wireless broadband.

On the whole customers distinguish between telecommunications services on the basis of Hygiene Factors. They notice more when things they expect to see are missing or not working as they should.

So, say, poor service, counts against a carrier more than good service works in their favour.

It is hard to make money from undifferentiated, commodity services. To keep shareholders happy, Spark and Vodafone have strategies adding value to core services.

Spark now a digital services company

At Spark the answer is to find more digital services to sell. Among other options consumers can buy video-on-demand services and home security from Spark. There’s a new fixed-wireless rural broadband service.

Businesses can buy sophisticated IT services including cloud computing from Spark Digital. The company’s Qrious operation offers big data.

Spark is moving to sell a broad suite of digital services to consumers and business.

Vodafone tackles enterprise

Meanwhile, Vodafone has pushed into the enterprise market. It used its Telstra-Clear acquisition to move into areas like the internet-of-things offerings. Vodafone’s involvement in the rural broadband initiative has seen it turn up at Fielddays. It now offers products aimed at farmers.

Both look to expand beyond dumb pipes into growth sectors with non-commodity margins.

At a recent function, managing director Simon Moutter talked of Spark selling overseas assets. It used the money to focus more on New Zealand investments. Almost $100 million of that went towards buying Revera, the largest local cloud service provider.

Worlds apart

If Spark is looking more like a New Zealand business, Vodafone is moving in the opposite direction. Today is more into line with its UK parent. Part of that is so the local company can give Vodafone’s global customers the same services they use elsewhere.

Vodafone has moved from being mobile-centric to a full-service telco. It has formed partnerships to reach new rural and enterprise markets. The advertising has gone from cool urbanites to a daggy farmer and his pig. That’s a metaphor for something.

There’s another, less divergent part of the NZ telco transformation story. Spark and Vodafone are working together to build a new submarine cable across the Tasman.

Maturity

Although the two companies are as competitive as ever, their ability to combine for a project like this signals a fresh attitude, a maturity.

In the last year new, or revamped, competitors have emerged for Spark and Vodafone. Australia’s Vocus has snapped up enough network assets to be a challenger.

Vocus is merging with another Australian company, M2, which earlier acquired the CallPlus group. The move brought fresh capital and momentum to the industry’s third largest player. 2degrees has broadened its scope picking up ISP Snap.

The market outside of Spark and Vodafone may be consolidating, but most of that action is in the traditional telecommunications sectors. While that may be the two big companies’ home turf, they are busy looking at new pastures.

Exports took off 150 years ago when steamships, railways and refrigeration took sheep meat, wheat, minerals and butter to the other side of the world. The telegraph, radio, aeroplanes and container shipping were all once innovative new technologies. They opened borders and stimulated international trade. Globalisation is not new.

Then the internet arrived. Optimists thought it would boost trade. The earlier export technologies were all about moving kilograms of things which could rot, break or sink below the waves on their overseas trip. It costs money to move atoms across the world. The internet could move the electrons making up digital goods for next to nothing and bypass tariff barriers.

Internet pioneers didn’t expect that moving business online would lead to consolidation. The commercial world has always leaned towards the winner taking all, overnight this happened on a global scale with less room for national champions. Now just one company can dominate a market around the world. Think Google with search, Uber with car trips or Netflix with entertainment.

Read the full story at iStart or download the magazine pages as a PDF.

Pacific Ocean

Writing on his organisation’s TechBlog, IITP chief executive Paul Matthews says after a meeting with New Zealand Trans-Pacific Partnership negotiators he feels more positive about what the trade agreement means for our technology sector.

Here are the edited highlights. The quotes are from Paul Matthews, the comments are from me:

We’ve received absolute assurances that nothing in the TPP will impact New Zealand’s current legal and policy position in relation to software patents. Hooray!

Hooray indeed. There is always a danger trade negotiators will cut deals that are good in the short-term for our larger industries but hurt less visible sectors or, in the case of software, an important but fast-growing export industry that has yet to reach its full potential.

There is pressure to increase copyright terms by 20 years, to 70 years after death. Some other copyright changes are currently proposed, but no restriction of copyright exceptions (eg fair use provisions), and parallel importing won’t be affected.

My income depends on copyright. That’s how I get paid as a writer and, most years, I get copyright payments when my work is reused. Copyright feeds my family, pays my mortgage and put my kids through education.

Copyright

This is not about benefitting authors or their families, it is all about corporations with large copyright portfolios. In many cases the terms were shorter when they first purchased those rights, so this is just a gift from governments and consumers to the rich and powerful.

The good news is that there are no plans to touch fair use provisions and parallel importing.

There could be some significant changes around Technological Protection Measures (TPMs), including criminalising circumvention of TPMs, however circumvention to access legitimate content won’t be criminalised. Global Mode-type services won’t be impacted (if they are legal under NZ law currently, which is still a little grey).

TPMs include things like DVD region codes, encryption and geo-blocking. This is a mixed bag. While it’s understandable companies want to protect investments in intellectual property, DVD region codes are an abomination. They only exist so copyright holders can squeeze more from customers in certain parts of the world, possibly more than is fair. It’s not about protecting rights, it’s about gouging consumers.

As Matthews points out later in his blog post, this is going to hurt groups like blind people who get around TPMs to use text-to-speech converters.

The key here is the extra cost of not getting around TPMs isn’t high at the moment, so we wouldn’t be giving away too much if we concede this point so long as New Zealand gets valuable trade-offs in return. It will be different if prices for protected content leap once this rule change is in place.

Because the legality of Global Mode hasn’t been tested — it’s unlikely it will be tested in the near future —there’s a question mark over what will happen to products that get around geo-blocking.

There won’t be any changes in New Zealand in relation to ISP liability for copyright infringement and TPP won’t require disconnection of copyright infringer’s internet.

On the surface this is good news.

Overall, if the assurances are borne out in the detail and no other fish-hooks found, we’re cautiously optimistic about the impact of TPP on the tech sector. But we’re still pretty grumpy about the secrecy aspects and want to see this changed for future negotiations.

“Grumpy” is putting it mildly. The way this works in New Zealand is that we’re not told what’s in the agreement until we wake up one day and find that it is the law. Large companies with effective government lobbying will have some idea, but it looks like we don’t get a say. That’s not good and it’s not democratic.

Trans-Pacific Partnership not transparent

A number of people have asked me to comment on and off the record on the Trans-Pacific Partnership, it’s something I can’t do in any meaningful way without knowing what’s in the agreement.

Cautiously optimistic about the TPP’s effect on New Zealand’s technology sector sounds about right. If what the negotiators have told him is correct, it doesn’t look as if there will be much harm done and we may get benefits from better market access elsewhere.

Trade deals are always about compromises. For the big countries the calculus is: “do we get at least as much back from the deal as we have to give away?”.

Little countries have less negotiating clout. Rightly or wrongly it seems New Zealand’s leaders feel we need to be inside the club, so long as the price isn’t too high.

Because trade isn’t necessarily a zero-sum game, a well-formulated trade agreement can mean everyone is a winner. At least at the country level. This often leaves many losers on a sector by sector.

If the negotiators were straight-speaking, then it looks as if New Zealand’s tech sector isn’t going to be a loser.