Hon David Cunliffe Minister of Communications

New Zealanders can look forward to faster, better broadband Internet services thanks to the comprehensive telecommunications package announced today.

Communications Minister David Cunliffe says the package is a vital part of the Government's drive to transform the economy and push New Zealand's broadband performance into the top quarter of the OECD.

"Access to fast, competitively priced broadband Internet is vital for New Zealand to take full advantage of new technologies," Mr Cunliffe said. "This package will help ensure we catch up and keep up with other developed countries."

Today's package includes:

· Requiring the unbundling of the local loop and sub-loop copper-wire lines between telephone exchanges and homes and businesses, allowing other Internet Service Providers to compete fully with Telecom to provide faster, cheaper broadband.

· Regulatory action such as information disclosure, accounting separation of Telecom's business operations and an enhanced Commerce Commission monitoring role in order to ensure improved competition.

· Removing constraints on the existing regulated Unbundled Bitstream Service to ensure ISPs can offer better and cheaper broadband at upload speeds faster than 128kps.

· Encouraging investment in alternative infrastructure such as fibre, wireless and satellite networks by measures including a review of public sector investment in telecommunications infrastructure to encourage a whole-of-government approach; reviewing whether Telecom's ability to reduce local prices solely in response to new competing infrastructure investment should be constrained; developing a rural package and expansion of the Digital Strategy Broadband Challenge fund. "We are continuing to look at whether additional measures are warranted, such as the structural separation of Telecom's retail and lines operations," Mr Cunliffe said.

Telecommunications stocktake backgrounder

The Government has become increasingly concerned about the significant gap in broadband Internet performance between New Zealand and leading OECD countries. Today's pre-Budget announcements on telecommunications are designed to overcome the problem.

Although New Zealand's performance has improved in some aspects through recent market developments, we remain in the bottom one-third of OECD countries across a range of telecommunications services, pricing and broadband take-up indicators.

There is increasing recognition that advanced broadband services are a key enabler of economic growth and the development of a knowledge-based economy, and most OECD countries are placing considerable emphasis on broadband performance.

In December 2005, in response to the evidence that New Zealand was slipping behind its OECD peers in broadband services, the Government commenced a stocktake of the telecommunications sector.

The purpose of the stocktake has been to consider developments in the telecommunications sector as a whole over the medium term (three to five years). While a primary focus has been placed on the broadband market and broadband performance as a factor in economic performance, the review has had regard to the overall performance of the telecommunications sector.

As set out in its Digital Strategy, the Government's goal is for New Zealand to be a world leader at using information and communications technology (ICT) for economic, social and cultural gain, and to ensure that all New Zealanders can access the benefits that ICT can bring.

Advanced broadband services are a key enabler of economic growth and the development of a knowledge based economy. High speed broadband brings about innovative new services and can help transform sectors, government services, and offer greater benefits for users.

A number of studies indicate that broadband take-up contributes to increasing GDP. An efficient telecommunications infrastructure is seen as a pre-requisite for a modern economy.

While dial-up (narrowband) Internet penetration is high, broadband uptake is comparatively low and concerns have been expressed about speed, pricing, quality and the availability of advanced services.

Why new policies are needed to close the gap

Other OECD countries have moved in the direction of more rigorous pro-competitive regulatory frameworks to improve access conditions. Analysis undertaken for the stocktake review similarly supported the view that the current performance gap will not be resolved under existing policy settings.

A key reason for poor performance is the lack of effective competition in key market segments. A common factor in the leading OECD countries is the competitiveness of their broadband markets. Although competition has increased as a result of recent market activity in New Zealand, it has not developed to the degree that is common in the leading countries.

Telecom dominates the broadband market. The majority of the alternative provider market share depends upon a restricted speed "unbundled bitstream service" (UBS) that allows limited options for competitors to develop differentiated broadband products.

Most OECD countries already have "local loop unbundling," in which competing telecommunications companies have access to the "last mile" of copper wires between telephone exchanges and homes and businesses to install their own equipment and provide their own competing services.

In May 2004, the Government accepted the recommendation of the Commerce Commission to introduce a limited speed UBS instead of more extensive unbundling. The decision was based on the expectation it would lead to the co-operative development of an effective wholesale market.

While Telecom achieved 279,123 residential broadband connections by December 2005 and exceeded the voluntary target for broadband uptake of 250,000, it did not, in the Commerce Commission's or the Government's views, meet the wholesale target that a third of these ( 83,000) be with wholesale customers (it achieved 63,495).

Stocktake outcome

The stocktake found that the local loop remains an access bottleneck that restricts the development of effective competition. New entrants require access on fair and non-discriminatory terms to Telecom's network, to be able to provide high quality, cost effective and differentiated services. "Last-mile" access for the majority of New Zealand consumers is likely to rely heavily on the local copper network for sometime.

The stocktake analysis indicated that unbundling and an improved UBS would help close the gap with other OECD countries on broadband uptake, price and quality.

A wide range of potential options was considered, ranging from the status quo through local loop unbundling and major interventions such as requiring the structural separation of the wholesale and retail businesses of Telecom.

It is important that a balance be struck between facilitating increased competition at the wholesale level by improving access to Telecom's network, in particular the "last mile" of the copper-based network, and retaining incentives for investment in new infrastructure such as fibre, wireless and satellite.

Key features of the final package

a Facilitating competition by improving access at the wholesale level to the fixed local-loop telecommunications network, through: - introducing local loop unbundling; - removing constraints on the regulated Unbundled Bitstream Service, including providing for "Naked DSL"; - requiring the preparation by Telecom of a set of regulatory accounts (accounting separation) based around its wholesale businesses; and - the preparation and disclosure by access providers of information to facilitate compliance with the applicable access principles set out in Schedule 1 of the Telecommunications Act 2001.

b Encouraging investment in alternative infrastructure (such as fibre, wireless and satellite networks), including by: - reviewing public sector investment in telecommunications infrastructure to encourage a whole-of-government approach; - reviewing whether Telecom's ability to reduce local prices solely in response to new competing infrastructure investment should be constrained; - developing a rural package and expansion of the Digital Strategy Broadband Challenge fund in the 2007/08 Budget round; - ensuring competitive access to spectrum for new wireless applications.

c Future-proofing the regulatory environment to technology change and market dynamics, including by: - empowering the Telecommunications Commissioner to undertake strategic reviews of sector performance; - reviewing the Telecommunications Service Obligations (TSO), with a focus particularly on delivery of rural services; - undertaking further analysis on the desirability of structural and operational separation options.

d Continuing the development and implementation of the Digital Strategy and encouraging the smart use of information and communications technology (ICT).

ENDS

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