BuddeBlog

Failing government policies
After a five-year-long battle with the New Zealand Government/Commissioner, TelstraClear has thrown in the towel and abandoned its ambitions to operate a national telecoms service in competition with the incumbent Telecom New Zealand.

This may be a victory for the incumbent, but it is a severe loss for the country. With New Zealand already at the bottom of the global penetration list for broadband, the likelihood of Telecom now becoming more active has lessened even further with its major competitor withdrawing from the market.

Also, TelstraClear’s retreat has delivered a severe blow to the pro-competition lobby. TelstraClear has been the major contributor to pro-competition submissions and, its lobbying power has provided other valuable resources to the industry over the years.

It will be interesting to see how the government now intends to stimulate innovation and competition in the New Zealand telecoms market. Competition is the key driver for this purpose, and TelstraClear’s retreat will severely undermine future progress.

I would argue that New Zealand, more than any other country in the western world, depends on telecoms for its future. Its remoteness from key international markets requires a high level of telecoms service penetration in new markets such as broadband, triple play, broadband TV, etc. And, furthermore, if New Zealand wants to promote its unique lifestyle features, telecoms is a major element to underpin such a strategy.

Without first-class access to such services overseas businesses and residents will have little interest in considering New Zealand. Without competition Telecom will continue to delay the introduction of new services – a decision that will be based on profit and not on the national interest. It is completely up to the government and its regulators to avoid such market dominance and to stimulate innovation through competition.

As far as I know this is the first time that telecoms competition has failed to such an extent anywhere in the world.

Back to the Trans-Tasman future
As I have said many times, Telstra’s role in New Zealand should be questioned. The New Zealand market is very small and I have never been able to see a clear role there for a company the size of Telstra. It should have bought Telecom if it was ever serious about the New Zealand market.

It now appears that it is retreating to its traditional 100-year-old interest in the country –Trans-Tasman traffic. Perhaps it needs a presence in New Zealand for that purpose alone – all the other services will arguably reduce the profitability of the company.

It is interesting to see that this is the second full circle for the company. After an early move into the New Zealand resale market in the mid-1990s the company decided to retreat into the Trans-Tasman business, and now, after the Saturn and Clear ventures, the picture is looking awfully familiar once again.

Niche NGN ambitions
For the time being, however, things have not gone that far yet. TelstraClear has indicated it will concentrate on expanding its own residential assets in Christchurch and Wellington, as well as focusing on its corporate and government business, closely linked, of course, to its Trans-Tasman business.

But, principally, it is about maximising its on-net assets rather than its off-net (resale) activities.

However significant new investments are needed to optimise these assets, and I question whether the New Zealand market in this niche segment will be big enough to deliver a reasonable return on investment.

While, a few years ago, the TelstraClear network could have been classified as superior to that of Telecom’s, the arrival of IP has eliminated that advantage and TelstraClear needs to become more serious about integrating the Saturn, Clear and Telstra systems.

For this purpose, investment in NGNs will be needed before the cost benefits are delivered. It will be interesting to see if Telstra can compete with Telecom in the corporate and government markets at a niche market level. Although this is possible it does require a very high degree of IT skill to move into a market that is rapidly changing from telecoms into IT. To date potential IT customers have avoided using telcos for such services. In Australia, Telstra has a very bad record indeed, and it certainly shouldn’t be used as an example of how to move forward.

Ongoing mobile saga
It is now even more unlikely that TelstraClear will roll out its own network – we have consistently maintained that this would never happen. Nevertheless the company does need a good mobile offering for its corporate customers.

I would argue that, while its current arrangement with Vodafone might not be ideal, it is still more profitable than running its own network in a market which, with 86% penetration, is rapidly reaching saturation point.

Paul Budde

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Telecom rolled a new 3G mobile service in New Zealand in November 2004 on its CDMA EV-DO network. Telecom’s 3G offering is being pitched across 2 networks – the base 1x RTT network, and the EV-DO high speed network available currently only in the main centres of Wellington, Auckland and Christchurch and a handful of holiday destinations. 200 out of a total of 800 cell sites had been upgraded to EV-DO by mid 2005.

Outside these destination speeds drop back to around 60-70Kb/s on the 1xRTT network. They are marketed under the one brand – T3G. Telecom plans to extend network coverage to all towns with more than 10,000 people by December 2005. By launching the service, Telecom has become first telecommunications provider in the world to provide international data roaming over 3G EV-DO technology.

The service allows customers high-speed access via mobile phones, WiFi hotspots and fixed line broadband. Customers can access data at broadband speeds averaging more than 500 Mb/s using laptops equipped with T3G mobile data cards or EVDO capable PC phones. The offering is primarily targeted at corporate data users desiring high speed email and Internet access and the ability to efficiently run thin client applications.

Whilst Telecom decided to roll out its own network, Vodafone on the other hand has contracted Nokia to build it a new W-CDMA network on rival standard UMTS for $NZ 400 million. The service was launched in August and video conferencing is the key differentiating offering for Vodafone.

Another difference is Vodafone’s nationwide coverage, unlike Telecom’s T3G service which is limited to major cities and holiday destinations. Telecom’s service however has a faster service.

The roaming cost in August 2005 of Telecom’s T3G services was NZ$19.95 per MB. Vodafone NZ responded by cutting its global data roaming rate by two-thirds to NZ$10 per MB.

Exhibit 1 – Comparison of 3G offerings from Telecom and Vodafone

Telecom
Vodafone

Technology
CDMA EV-DO
W-CDMA

Deployed
December 2004
August 2005

Network Operator
Lucent Technologies
Nokia

Maximum data speed
2.4 Mb/s
384 Kb/s

Average speed
500 Kb/s
150 Kb/s

Data speeds
Higher
Lower

Coverage
Limited to major centres and holiday destinations
Nationwide

Global roaming
Limited
Superior

Devices on launch
Limited
Greater range

Alliance
With US carrier Sprint
Part of largest global mobile group

(Source: Paul Budde Communication based on Telecommunications Review and company data)

See also:
New Zealand – Mobile Communications – Statistical Overview and Major Operators
New Zealand – Mobile Communications – Market Overview & Analyses
New Zealand – Mobile Communications – Spectrum

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The trend has been much slower than I expected, but there is a slow movement in the direction of total outsourcing to the vendors of the building and operation of telecoms infrastructure.

I have been expecting this to happen for more than a decade, but finally the trend has started, and more and more networks are being outsourced. With monopoly rents disappearing rapidly, telcos have to work with lower margins.

Another reason is that the introduction of NGNs requires a totally different approach to infrastructure architecture, and the telcos have little or no expertise in this area. On top of that, the internal silo-based structures are generating a lot of opposition to the introduction of these NGNs, as they are tearing down the ivory towers and will result in very significant job losses.

Also, in a number of developing markets where new networks are being built the costs have to be low enough to sustain very low ARPUs, and savings can obviously be made by letting the vendor build and operate the network.

Some telcos are still reluctant. The most common arrangement at the moment is that the telco still ‘owns’ the network while the vendor builds and operates the infrastructure.

Unfortunately, rather than using this concept to their marketing advantage, the telcos have resisted it. They are only being forced to look at it now because they need to cut costs.

I also predicted at that time that this would lead to more formal structural separation, which eventually would result in vendors also owning the network and sharing it with other operators. In many situations infrastructure is a natural monopoly or, at best, an oligopoly.

The competition should be focused on the services delivered over those networks, with ongoing regulatory safeguards to keep a check on the infrastructure monopolies.

Paul Budde

See also:
Global – Analysis – Telecommunications Industry

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