Prospects for telco competition evaporate

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If the latest rumours are true, the prospects for telecommunications competition in NZ are about to evaporate. There are rumours that Vodafone in NZ are in talks to buy-out Telstraclear, the NZ subsidiary of Australia's Telstra. Telstraclear has in recent times been offering the most competitive telco packages, so it strikes me as probable that Vodafone will be looking to unhinge its competitor before it poses a risk to its margins. NZ is of course a stagnant market; so its understandable why Telstra is leaving. The question is why they ever entered the market in the first place....if not just to 'extort' a buy-out from one of the majors by selling its customer base. Entering the market at the very least would have given it a better understanding of the market and its competitors.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

The cost of the next generation of NZ broadband

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Living in NZ is always going to be a bit of a technological 'drag'. This is a small market, and one of the poorest OECD nations. For this reason, technology is always going to be a little slow getting here. The situation is even worse for basic infrastructure like: Roads, power lines, telco fibre lines, power stations, etc. The challenge is that:

1. There is little incentive for service providers to upgrade infrastructure if their competitors are not. A small market with just a few players gives little incentive for competitive pricing.

2. There is little incentive to adopt the latest technology if there is no growth in the market. National income in NZ is based on cyclical commodity prices, so with a static population, there is little incentive for increasing capital investment unless you have some important national resource like oil & gas or iron ore. NZ has......very little.

3. There is little incentive to be competitive without a regulatory regime to ensure that result. There is a propensity to use the 'weak regulatory framework' to extort highe revenues from customers.

Businesses however have to make money, or there will be even less spending or service. The question is whether the industry is functioning efficiently, and earnings are adequate.

This article outlines the cost and pricing for the next generation of the telco network. The actual cost is uncertain because it remains to be seen whether service providers offer unlimited capacity. I suspect they will want to offer unlimited capacity where they can otherwise they will lose customers, and there will also be excessive customer churn, i.e. Excessive reconnections.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Communications in NZ - a lack of competition

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One of the challenges of getting basic services in an uncompetitive, small market like NZ is that you have to contend with the proverbial 'carrot and stick' approach to market extortion. i.e. Market participants who put forward meaningless pricing plans with so many **** that you will probably pay double the stated rate. The implication is that you can spend your life investigating 'cheaper deals' which are nothing of the sought. In most countries such 'bait advertising' is disallowed, but because you have a ***, they get away with it, even though the price differentiation point is hardly an incidental pricing qualification, but rather a profoundly necessary cost you will have to bare. All the market players do it. The implication is that no pricing is real until you spend 1 hour investigating it.

In the telecommunications market, there are two dominant market players - Telecom and Vodafone. These two companies are famous for offering no real competition. i.e. They will offer you a 'special' of an extra 20Gb of broadband a month, as if that is of any value. After all, what are you going to do with that if your monthly need is just your contracted amount. They might offer you a teaser of a free wireless modem, even though wireless bandwidth is really expensive, and these little modems can be bought in China for $5. They sell them for $100 plus. 2 degrees is probably the cheapest, but try independent sellers.

You need internet in NZ, and because its rare to get free wifi in NZ, you really want a well-priced wireless solution if you are moving around. The problem is that you are stuck with these two majors. The only alternative is 2 degrees, which is confined to the 3 major cities and Queenstown. That is a very limited choice.

Outside the major cities you also need a landline telephone. You cannot just satisfy yourself with a ADSL connection. Vodafone offers such a plan but its very expensive. So you are stuck paying $110/month for a landline and ADSL for 20Gb, less in the cities because you don't need a telephone line rental.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

The prospects for a competitive telecom market in NZ

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You might ask - what would a free marketer like myself expect from a NZ broadband network. We all have long come to understand that free markets don't always deliver desirable outcomes. There are reasons for this:

1. Cross-market subsidisation - profits extorted through market power in some market can be used to finance new investment in others. We thus want to ensure in a global world that companies are able to finance improvements to services, but that any surplus profits are invested in the local business.

2. Market collusion - profits are not able to be excessive because two market competitors are able to extort excessive prices from the consumers who have no 'effective' choice. It matters little if there are just two players pretending to compete or 10 who have a formalised price-following or price-targeting strategy. i.e. You might find that the CEOs of these companies get together and they decide that in 2011 Telco A will be the price leader, in 2012 Telco B will lead any price changes. It goes without saying that those pricing changes will be favourable.

3. Transfer pricing - They all establish enterprises abroad, say in Ireland (with a lower tax rate), which purchases the hardware, and they pass on the costs to the NZ operating entity, so they look competitive, and profit margins look thinner.

4. Accounting tricks - Maybe they will use creative accounting to understate profits, such as making provisions for the acquisition of future capital, or the depreciation of old plant, which help to understate costs. These provisions don't even have to be real; they are just planning, so those profits can be released at any convenient time.

The question then becomes as to how does one achieve a truly competitive market? Or how does one ensure that business earns a reasonable profit, business has an incentive to cut costs, but at the same time provide an efficient service; and how does one get business to accurately and honest report its performance such that the market achieves an optimal outcome. We might also ask:

1. What constitutes fairness? Who gets the market surplus created in these transactions - the consumer or the business operator? Who created the surplus? Business.

2. What right does the consumer (or the government) have to ensure surpluses are not invested abroad in new or more competitive markets?

These are the intellectual questions that never seem to get answered. They are not new questions. They were asked and answered by people like David Ricardo and Karl Marx; not always with desirable interpretations. Far from wanting revolution, I would like to see an efficient market. Perhaps the strongest prospect for competition comes from a change in the way we structure society. This is an intellectual debate we do not have because our political system is so impervious to ideas. People are so concrete-bound. They are reluctant to engage with ideas, because the legislature does not place a value on ideas. It values perceptions because that is what the majority of voters respond to. They response to the 'concrete' because they have no effiective power, they have little specialised interest in all-manner of issues. So they are passive, only responsive to subtle messages.

I am not going to answer this question here. The greater issue is our political system.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Telecommunications in NZ

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The Commerce Commission has released a report showing that NZ telecom charges are the highest among OECD countries. There are a number of problems:

1. The high cost of data capacity

2. The cross-subsidisation of 'local call' users

3. The requirement for rural customers using data only to have a landline as well, thus they are obliged to pay an extra $56/mth for a service they do not use.

Telecom and Vodafone do not compete much. We currently get the Telecom plan because we do not require a contract. We pay $112/month for 20Gb/mth capacity. The service is reliable enough, though in some areas you can wait for up to 2 years to get a connection. I had better options in the Philippines...a third world country. Australia is about 30% cheaper I believe, though it does depend on your plan and location.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

NZ Telecommunications - infrastructure you can depend on

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Thinking about immigrating to NZ....think twice. The country has the worst telecommunications infrastructure. Internet connections are slow, expensive, and come with low download limits. Some of you are accustomed to no limits on download. There are several problems:

1. Lack of competition on fibre leaving the country - that will change in the next few years

2. Local nodes - all owned by Telecom NZ - which I guess in a static growth market is holding out for new technology.

The result is that people are having to wait up to 2 years for a broadband landline connection, and are otherwise restricted to 4Gb per month download limits for a mobile broadband service, which is severely restrictive in where you can access it.

Matters are better and worse in rural areas. You will have to pay $49/mth for a telephone rental service, even if you are only using data. You will have more chance of getting a broadband connection though, because fewer people are using them.

If this is enough for you to look elsewhere, and you are looking for a similar place on Earth, you might want to consider Tasmania (Australia). It has the fastest broadband in Australia, with speeds of 100Mbps for the whole island, though it is a small island....so much like one island of NZ, but at least it is stitched on to the mainland, and Melbourne for access to a major city and airport. Don't expect a subsea tunnel however, its a 120km wide trip.

In defence of NZ...I have used both the Telecom and Vodafone services and they are both similarly priced and reliable. Telecom at our purchase point was better because we did not have to commit to a contract. I think that is why Vodafone started losing market share.

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Author Andrew Sheldon| Applied Critical Thinking | www.SheldonThinks.com

Broadband in NZ

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Broadband services in NZ are very expensive. There is little competition, particularly outside the 3 largest cities. You will find it hard to get wireless services outside the cities as well. We met a farmer who goes to the library, even though he signed up for a wireless service.

Vodafone and Telecom both offer similar plans. If you are in the larger 3 cities - Auckland, Christchurch and Wellington - you ought to look at the deals from Woosh and Orcon as well. We used Vodafone last year. The service was ok. They had high costs to connect and disconnect, so we cancelled, and now we are on spot agreement (i.e. no contract) with Telecom, because se don't spend much time in NZ. The good news is that if you intend to spend 6 months here, 6 months abroad, its easy enough. You just get a spot agreement for say 20Mb, which is $59/mth, plus $47/mth for telephone connection. If you want broadband only, outside the 3 largest cities, the telephone connection is compulsory. This is a similar cost to Vodafone on a contract. Vodafone offers no services off-plan. The benefit of our no-contract is that:

1. We can cancel our tel connection without charge and the telephone exchange will retain our number for 12 months, so we can pick it up in 12 months when we come back.

2. We were able to change the settings on our Vodafone modem so we could use if with Telecom.

Don't let them tell you you need a proprietary modem. Just contact the company to find out how to change the settings.

Contracts tend to come with a free modem. Since we already had a modem, we did not need that free add-on.

Broadband services in NZ

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Reading an article today in the Wanganui Chronicle, I am inclined to think that the biggest obstacle to development in NZ is the poor quality and high price of its interest services. Wanganui is one of the largest cities in NZ, yet it has one of the worst internet services in the country. My guess is that the problem will be fixed within 3 years, but thats not soon enough. It will eventually get high speed fibre optic services. The National Party has yet to commit to a fibre optic network connection. Other surrounding districts have it. Wanganui is currently using the old Telecom NZ copper ADSL network. In fact APN has already been contracted to build another 2MB copper line to handle the traffic. It seems silly to be investing in old telephony technology given that fibre is imminent. Fibre services can be as fast as 100-1000Gb depending on the infrastructure constraints. Digital Nation has set up a small privately owned network in Palmerstown. One wonders why the same cannot be done in Wanganui, perhaps with a subsidy from the council. More on that in my next article. The national government proposes to spend $1.6bil on linking the 22 largest cities with fibre optic lines in future.