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The Commerce Commission released its first estimate of the amount carriers will each pay for their share of the 2012-13 Telecommunications Development Levy. The $50 million levy is used to pay for public good telecommunications projects including services for the deaf, 111 emergency services and rural broadband.

Carriers earning more than $10 million a year from operating public telecommunications networks contribute roughly 1 percent of revenue towards the levy. In the past Telecom NZ and Vodafone have paid most. More recently Chorus has been added to the list. Between them, the big three pay 90 percent of the total with the rest coming from another 19 companies.

The Commerce Commission publishes what it calls a draft liability allocation determination. When this is published there’s usually some haggling over details in a submissions process. That’s happening now and a  final decision is expected on December 20.

  • Chorus chairwoman Sue Sheldon used the annual meeting in Wellington to criticise the Commerce Commission cutting copper access prices saying it undermines the government-sponsored UFB project. She says: “Investors now attach a regulatory risk premium to Chorus and this has implications for our cost of capital”. She says this means investors now see New Zealand telecommunications as un-investable.
  • Unisys New Zealand renewed a six-year mainframe service contract with Inland Revenue. Neither party is saying how much the deal is worth, but the IRD says it will not need any new money from the government. IRD also said any decision about replacing the mainframe will be taken as part of its transformation programme. Last year the IRD warned that ageing technology put its ability to collect tax at risk. It said it would need to spend as much as $1.5 billion over 10 years on a replacement.
  • Te Miro in the Waikato is now connected to the government’s rural broadband network. Vodafone says it switched on its newly built 25m lattice tower giving coverage to 400 households. Vodafone says the last tower planned for Waipa District under the RBI, Maihiihi, will provide mobile coverage and wireless broadband for an extra 110 homes and businesses.  Vodafone has also upgraded all six of its existing sites around Waipa District, including Karapiro, Cambridge, Kihikihi, Te Awamutu, Mystery Creek and Lake Karapiro.
  • BusinessDesk reports TradeMe told shareholders at its AGM it is set to 40 new tech workers to work on-site upgrades. TradeMe told shareholders to expect subdued growth in the coming year.
  • Cloud specialist GreenButton has a new partnership with Verbatim Reporting which it says will help courts, law enforcement agencies and law firms index audio and video of proceedings.
  • Not keying bank transaction data into accounts systems thanks to automatic bank feeds is worth 10 hours a month or an average of $458 dollars per company says MYOB.

New Zealand’s 700 MHz spectrum auction went almost to plan. Two of the three bidders, Telecom NZ and Vodafone, walked away with three 5 MHz paired blocks. 2degrees picked up two 5 MHz paired blocks leaving one unsold block.

As Communications Minister Amy Adams pointed out in a press release earlier today, that means three carriers have enough spectrum to build viable 4G networks. This is a good thing. Three carriers means real competition and consumer choice.

Government will eventually pick up cheques for $176 million.

Carrier incentive in spades

The money paid was high enough to make sure the purchasers have every incentive to exploit their new frequencies to the greatest economic advantages – which means New Zealand will get better wireless data services.

And the price was low enough that the cost won’t cripple them. This means the carriers should have enough left over to afford to pay for the network roll out.

This leaves only one fly in the ointment: the single 5 MHz block left on the table.

2degrees leaves 5 MHz on the table

2degrees could have picked it up. Presumably the reserve price of $22 million was too high. Or more likely, 2degrees’ bean counters decided the $22 million asking price plus the millions required to build new towers and install new kit might not deliver enough of a return on the investment.

The rules of the auction say Telecom NZ and Vodafone may be offered the opportunity to buy the extra spectrum. If one of the two did, it would mean a lopsided 700 MHz playing field.

Potentially a player with four 5 MHz blocks could dominate the market. That’s because more spectrum make it possible to push data at fast speeds. So, theoretically if say, Vodafone picked up the remaining 5 MHz pair to have a total of 20 MHz paired, it could offer data speeds that are twice 2degrees could offer with a 10 MHz block.

This is where things get interesting

If the government was only interested in maximising the return on the spectrum auction, it would allow the two bigger carriers to start bidding again. Assuming they both want more spectrum, that would mean they would be likely to offer more than the $22 million reserve price that the other eight 5 MHz blocks sold at.

There’s a potential financial windfall – the government expected to get $198 million from the auction. So far it hasn’t made that amount. A competitive auction would probably push the total revenue past $200 million. I’ve never met a government yet that can find ways to spend extra money that falls into its lap.

On the other hand, there are good arguments to leave the 5 MHz pair on the table for now. Tuanz CEO Paul Brislen argues this in a blog post. He says: “this would be a bad outcome for customers”. Brislen also makes the point that Australia has gone down that path and seen competition effectively ruined because one carrier had the lion’s share of spectrum.

Some telcos agree

2degrees would like the unsold spectrum left on the table. While at first this sounds like a self-serving proposal, there’s more to it than is immediately apparent. Brislen’s competition argument, or something like it gets plenty of support. NBR reports that even Telecom NZ has “no issue” with the idea. Vodafone didn’t comment on the suggestion. This hints at which carrier is keener to pick up the spare 5 MHz. Of course in both cases we could just be seeing what was in the days before gender enlightenment was called ‘gamesmanship’.

So here are the basic choices facing Adams and the government: bank another $22 million or forgo the money for now and keep the market competitive. Competition will almost certainly be worth more than $22 million over the next five or so years. And anyway, that money doesn’t disappear – the government will be able to sell the spectrum later if it chooses. The decision comes down to whether government takes a short-term or long-term perspective.

Clare Curran’s creative idea

One of the most creative ideas comes from Labour’s associate Communications and IT spokesperson Clare Curran. She starts by getting a poke at the government:

The 700 MHz spectrum auction announced today appears to have been somewhat of a clayton’s auction as everyone has paid the same minimum price, leaving Vodafone and Telecom with the lion’s share of the auctioned spectrum and 2 Degrees as the lesser player in this critical market.

Well that’s politics. The next part is interesting:

Despite the concession of ‘pay as you use’ spectrum, 2degrees is clearly struggling to keep up.

It sure looks as if 2degrees is playing catch up. Apparently 2degrees has more mobile customers than Telecom NZ, but on average they each spend less than the people with accounts on the other two networks. The real problem is that running a mobile network means continually going back to invest in more kit while customers continually expect prices to fall.

Curran hits the nail on the head when she says:

If New Zealand is to have a genuinely competitive mobile market then what happens to the unsold spectrum will determine competitive prices for Kiwis in the years ahead.

So, we’ve identified the problem, what are the options. Curran neatly summarises the obvious three approaches before throwing some new and potentially exciting into the mix:

The Minister has three choices: she can either announce a follow-up auction of the unsold spectrum to the highest bidder; put the unsold spectrum on the shelf and not sell it; or keep it as strategic competitive reserve to stimulate competitive activity in the market, such as an incentive to a fourth entrant and for rural purposes only.

Now that’s an original idea. Would 5 MHz paired be enough for an interesting rural play? I don’t know, but it’s good to see fresh thinking.

Telecom NZ reports an 83 percent growth in data use on its mobile network in the past year. It says increasing smartphone ownership and video streaming applications are behind the surge.

The company reports the average amount of data per customer on the mobile network was 396 MB in September 2013 compared with 385 MB in August and 253 MB in September 2012.

Telecom NZ also specifically mentions the America’s Cup yacht races as responsible for the kickstarting the popularity of video on mobile phones. Recently I spoke to a senior Telecom executive who said the race series in San Francisco was a turning point for streaming.

Wi-Fi network up too

Meanwhile Telecom NZ’s Wi-Fi network, which gives mobile users additional data access while in the move saw its traffic climb 20 percent in the last month. The amount of data per user dropped during the month, Telecom NZ says that’s due to the large number of new customers starting to use the service.

International cable trends – click on image to enlarge
International cable trends – click on image to enlarge

The numbers in Telecom NZ’s chart showing international submarine cable traffic trends make a strong case for making a trans-Tasman link a priority in front of building new connections across the Pacific. As the chart shows, the trans-Pacific share of traffic has fallen from around 90 percent of the total in 2004 to around 60 percent today.

Telecom NZ and other industry insiders have previously told me more and more international content is being hosted and served to New Zealand out of Australia. There’s also a move towards communications with Asia. This trend is likely to continue with large multi-nationals such as Amazon and Microsoft building regional data centres in Sydney and Singapore.

spectrum

New Zealand’s 700 MHz spectrum auction is due to start today. The auction is for nine parcels of 5 MHz paired spectrum. Each parcel has a reserve price of $22 million. That’s a total of $198 million. Few expect the auction to raise much more than that figure.

In the first round of bidding each bidder is limited to buying three parcels of the spectrum. With only Telecom NZ, Vodafone and 2degrees registered to bid, there are unlikely to be many surprises.

The only unknown is whether 2degrees is able to buy its full allocation of 15 Mhz paired for $66 million. Should it fail to do so, Telecom NZ and Vodafone will each be invited to bid for an additional 5 MHz block.

The 700 Mhz spectrum became available after New Zealand switched from analogue to digital television broadcasting. 700 MHz is especially well-suited to 4G mobile data networks, particularly in less densely populated rural areas because signals can travel further.  Or to put it another way, carriers can cover the same amount of ground with less physical infrastructure.

There are some interesting auction rules requiring successful bidders to increase their network coverage. For more details, see the Radio Spectrum Management website.

IT Minister Amy Adams with IITP Chair Ray Delany
IT Minister Amy Adams with IITP Chair Ray Delany

Communications and IT minister Amy Adams delivered a wide-ranging speech opening the 2013 IITP Conference in Tauranga.

She used the occasion to clarify her position on two contentious issues: the Telecommunications Interception Capability and Security (TICS) legislation and government intervention in copper pricing.

Adams talked down criticism of TICS saying we’ve moved from having one company control the only significant network to a time where there are multiple networks and many companies to deal with.

Communications different

She says: “The way we communication now is different to the copper era and the industry operates differently. We haven’t changed our definition of what is a network operator or what is a service provider and what their obligations are.

“The new law is simply a matter of updating the rules for a digital world. What hasn’t changed is the importance of real time interception for law enforcement. The police are dependent on real time interception to tackle crime”.

Adams says contrary to what some critics say, the new law does not open backdoors or give the GCSB fresh powers: “It doesn’t related to stored data or cloud computing. Interception requires a single warrant to cover a single person”.

Google, Microsoft

The TICS legislation has come under fire from industry players and from international companies like Google and Microsoft who saw the laws as imposing new constants and said it presented them with a serious legal conflict. Demands from New Zealand agencies to turn over information elsewhere in the world could see them break local privacy and confidentiality laws.

Adams says these companies misunderstood their position under existing law. The definition of a network provider hasn’t changed. And as for the legal conflict, Adams says the TICS legislation calls for a “duty to assist”. This comes with a reasonability test.

Not a tax, nor a transfer

Turning to copper pricing Adams points out the money is not a tax or a transfer. She say it is a matter between wholesale and retail service providers (i.e. Chorus and the ISPs). “I’ve not seen any indication the service providers would pass the savings on to their customers”.

Part of the debate hangs on establishing the cost of building a modern replacement for the copper network.

She says the modern alternative is a fibre network: “Normally we look at international benchmarks are overseas best practice. But when it comes to determining the cost of building a fibre network, we know what the prices are because we’re building one here”.

Adams says the controversial copper price regime would only last for five years from 2014 to 2019 when new regulations would come in.