Unbungling: Can We Catch the World in Broadband?

Listener: 1 July, 2006. 

Keywords: Business & Finance; 
It is not the first time that Telecom New Zealand has been “unbundled”. When it was a state-owned enterprise in the 1980s it was directed by its owner (the government) to provide the local-loop lines, which connect households and businesses to the telephone exchanges, separately from the service that goes down the lines. When the company was privatised in 1990, there was not a single Cabinet paper discussing its monopoly power – an astonishing oversight, perhaps justified by the government’s priority for a speedy sale, or perhaps an extreme ideological stance lurking beneath the privatisation advice. 
Whichever, as soon as Telecom was privatised, the two activities were snapped together. For the next 16 years, the regulatory framework was set by private litigation, which was always costly and frequently unresolved. The government imposed a telecommunications regulator in 2001, but eventually it lost patience, and announced that it will require Telecom to unbundle. By 2008, any other providers will have the same opportunities as Telecom to use those lines. 
Key to Telecom’s monopoly is that the local loop is a “common carrier”, a natural monopoly that is the only option to provide a service. It is true that a favoured few have an alternative line provided by TelstraClear, but it has stopped expanding its network. A relatively new technology, Digital Subscriber Line (DSL), means that Telecom’s traditional copper line can be used to deliver broadband (high-speed data transmission) more cheaply.   

Although cellphones are replacing fixed phones for voice calls – it may be that soon 70 percent of such calls will be on a mobile – the fixed-line system is increasingly carrying information in new forms: internet, music, TV, videos, other data. No one can be sure of the long-run potential uses of broadband, for innovations are turning up all the time. What we are sure of is that the future of world-class economies is dependent upon high-quality and quantity broadband delivery. 
Regrettably, New Zealand has been a laggard in the OECD broadband stakes. The easy explanation is that monopoly Telecom has not kept up with the pace. But the common carrier element of the monopoly may not be the problem. Rather, so it is argued by Telecom’s rivals, the combining (the bundling) of the common carrier with the services carried over the lines means that Tele-com has not been as innovative and service-oriented as it could have been in an environment of fair competition. They claim that given the same access to the lines they can provide better services to households and businesses by putting equipment in the exchanges to use the local loops. 
What may have been persuasive to government – recall it has been fumbling with this issue for over 16 years – is that the dominant and increasing pattern among rich countries is to unbundle line provision from services. Already 26 of the 30 OECD countries have unbundled loops, with New Zealand and Switzerland about to join them. 
Intriguingly, the sharemarket reduced its valuation of Telecom by over $2b, indicating it thought that the unbundled company would be less profitable than the bundled one. It must have been assuming that Telecom was making monopoly profits. Telecom has said it will co-operate with the unbundling directive, perhaps because it judges the political pressures are too great, but it certainly will have observed that British Telecom profits went up when it was unbundled, because the greater competition meant more use of its lines. 

If the unbundling is successful, we may even see Telecom split itself into two separate companies, one based on lines and the other on service provision. Because each activity has a different risk-to-profitability profile, shareholders would prefer them to be “unbundled” (to use the term in a different way) so that individual investors could chose their preferred mix of the two profiles.  But although that will be one indicator of the effectiveness of the unbundling of Telecom’s lines and services, it will not measure its success. That will be the extent to which New Zealand closes the gap between its broadband performance and that of the rest of the OECD. Australia did so spectacularly when it unbundled. We should, too, with a major boost to businesses’ productivity and the quality and interest of consumer life.