Paul Budde: Analysis Of Telecoms Amendment Package

I had a very interesting week in New Zealand, happily coinciding with the discussions that are taking place there regarding its telecoms reforms.

With Parliament debating the new telecoms amendments there was hope that some of the outcomes of the discussions we had during the Roundtables in Auckland and Wellington would filter through to the policy-makers. However, unfortunately, it looks as though the policies are more or less set in concrete and that the outcome will be more of a political compromise with the more conservative elements in New Zealand politics, who have been sheltering Telecom from competition for more than a decade. The old guard prevails.

I have tried to single out one issue that I believe is critical to the future of telecoms in New Zealand. The proposed amendments will see the regulatory management split between the minister and the regulator. This is, of course, a recipe for disaster. It sends out all the wrong signals to the industry. If you can’t get your way with the Commerce Commission you simply go to the minister, and vice versa.

I made the point that, while local loop unbundling is important, the rest of the world is now debating how to regulate access to All-IP networks, increasingly based on fibre rather than copper networks. Again, this requires a very strong regulator, who needs to be in charge of the management of the regulatory aspects of the NGN process.

The split undermines the Commerce Commission’s ability to take a leadership role here.

I understand that the minister’s reason for wishing to hold on to the reins is to secure decisive action in the operational separation process. I am totally unconvinced.

New Zealand only has to look across the Tasman to see what that means. In Australia (unlike, for example, the European countries) the minister is also in charge of operational separation, and over the last year NOTHING has happened.

If the minister is genuinely worried about this he would provide the Commerce Commission with the necessary powers to implement operational separation. As the British model is the one used by New Zealand you only need to look at the regulator there. OFCOM is the model that is admired by most regulators around the world. Why not ensure that the Commerce Commission can act independently, like OFCOM?

Other issues that need to be fine-tuned include a more independent status for the working groups currently set up by Telecom. I applauded Telecom’s initiatives earlier in 2006 – now is the time to make them more official and independent.

Last but not least, politicians like to leave grey areas, since they are far less inclined to make the hard decisions upfront. This applies to pricing and other commercial elements. However, this approach will only prolong the pain, as the players will exploit these grey areas to play games with the regulator, delay implementation, or simply to create confusion.

With so many uncertainties remaining, the government should make sure that the stick of structural separation is at the ready, as that will help the industry to make progress. Without this stick delays are inevitable.

Paul Budde

Executive Summary

Telecom New Zealand maintains a stranglehold on the local access market in fixed-line voice and broadband. It has made steady progress during 2006 with strong growth in broadband and data services; however it is still heavily reliant on revenue from declining traditional services. Total market growth of around 3.9% is predicted in 2007 and 3.6% in 2008, down from 4.1% in 2006. The combined fixed network voice and local access market displayed negative growth for the first time in 2006. This negative growth will gradually accelerate over the next few years. Mobile growth will, however, begin to taper off as the market approaches saturation.

It was not until mid 2006 that the government put legislation in place that will pave for the way for LLU. Both LLU and an upsized UBS service should, but will not necessarily, allow triple play services. While upsized UBS went live in 2006, LLU and Naked DSL are still waiting for introduction, perhaps in late 2007 or possibly even as late as 2008.

This report provides a detailed overview, including statistics, forecasts and analysis, of the regulatory, infrastructure, fixed network voice and VoIP sectors of the New Zealand telecommunications market.

Key highlights:
Market overview
•The total telecoms market in New Zealand grew by 4.1% from $7.75 billion in 2004-05 to $8.03 billion in 2005-06.
•Total market growth of around 3.9% is predicted in 2007 and 3.6% in 2008.
•Telecom maintains a stranglehold on the local access market in fixed-line voice and broadband.
•The combined fixed network voice and local access market displayed negative growth for the first time with growth of -1.8%. This negative growth will gradually accelerate over the next few years: -2.0% is predicted for 2007 and -3.0% for 2008.
•Data and broadband will take over from mobile services as the key driver of overall market growth from 2007 to 2010.
•Mobile service still grew very strongly in 2005-06, displaying 8.6% growth.
•Mobile growth will, however, begin to taper off over the next few years as the market approaches saturation, with revenue growth of 6.1% predicted in 2007 and 5.0% in 2008.

Key players in the market
•Telecom made steady progress during 2006 with strong growth in broadband and data services, however, it is still heavily reliant on revenue from declining traditional services.
•Telecom is expected to launch high-speed ADSL2+ broadband services on its Next Generation Network (NGN) beginning in 2007.
•TelstraClear expects to launch its first high-speed mobile broadband and voice service by mid-2007.
•CallPlus has a strategy to roll out WiMAX nationally and has investment backing for the $250 million that will be needed from 2006 to 2010 to achieve this goal.
•In late 2006 Vodafone New Zealand acquired 100% of local ISP ihug. The partnership opens up exiting opportunities for the pair in the area of fixed-to-mobile convergence in 2007 and 2008.
•Kordia, formerly known as THL Group which included BCL, is working with New Zealand broadcasters to deliver digital television in 2007.

Telecommunications infrastructure
•By late 2006 New Zealand trailed behind most of the western world in the adoption of high-speed broadband access.
•The government’s decision not to agree to go ahead with LLU until in mid-2006 has meant that ADSL2 and ADSL2+ adoption has been very slow. It now appears that LLU is unlikely to be implemented before late 2007.
•In August 2006 Telecom finally announced that its NGN was now expected to be completed over a two year period to 2008.
•For the past few years the industry has seen a significant rise in the use of wireless technologies as serious competition to the more traditional copper and fibre optic-based solutions.
•A number of niche fibre optic networks have also been established.

Regulatory
•In June 2006 the government introduced a new Telecommunications Amendment Bill to parliament, regarding new broadband access regulations.
•The Bill enables the introduction of unbundling of the local loop and accounting separation for Telecom.
•The Bill also amends the existing unbundled bitstream service and its supporting backhaul service to remove the existing constraints placed upon it.
•Access seekers are now given assurance that they can purchase Naked DSL services without any requirement to purchase an analogue telephone service.
•Although by 2006 there had been a regulatory UBS in place for some time, the speed was slow, especially on the uplink.
•Both LLU and an upsized UBS service should, but will not necessarily, allow triple play services. While upsized UBS went live in 2006, LLU and Naked DSL are still waiting for introduction perhaps in late 2007 or possibly even as late as 2008.

Fixed network voice and VoIP markets
•In 2006 Telecom maintained its virtual monopoly over the local access market, with an untouchable market share of 80%, which has been relatively steady since 2003.
•The fixed network voice market declined by 1.8% in 2006 and we predict that it will decline a further 2% in 2007.
•A key driver for the decline in local call revenues during 2006 was a migration from dial-up Internet access to broadband. Long-distance calling prices in particular continued to fall.
•The market also continues to shrink at the expense of alternative access networks such as mobile and VoIP as well as products based on data and IP-based solutions.
•ihug, since acquired by Vodafone in 2006, is one of the smaller alternate providers that has potential to make some inroads in the market, although from a very small base.
•While there has been significant adoption of VoIP and IP telephony amongst the business sector, especially amongst larger organisations, residential VoIP adoption in New Zealand is lagging most of the developed world.

Paul Budde

Executive Summary

The New Zealand mobile market is now approaching saturation and mobile subscriber growth will taper off significantly in 2007 and 2008. During 2006 the trend of ISP consolidation slowed; however, moving forward into 2007 and 2008, commoditisation of products is likely to see the speed of ISP consolidation pick up once again. The long-awaited government policy on Local Loop Unbundling (LLU) was finally introduced in New Zealand in mid-2006.

A growing number of wireless broadband players, including Woosh Wireless and CallPlus are also making some inroads into the market and this trend will continue into 2007. ADSL2 was the prevailing high-speed broadband technology deployed in New Zealand in late 2006. Broadcasting’s ad revenues are gradually being squeezed due to falling audiences and rising costs.

The progressive introduction of ADSL2+ broadband will enable the delivery of new services on top of Telecom’s broadband infrastructure. Services delivered over its NGN in 2007 and 2008 will include VoIP, video calling, converged fixed/mobile offerings, Interactive television and VoD.

This report provides a detailed overview, including statistics, forecasts and analysis, of the mobile, Internet, broadband, convergence and broadcasting sectors of the New Zealand telecommunications market.

Key highlights:
Mobile
•The current mobile market is a duopoly of Vodafone New Zealand and Telecom Mobile.
•They operate the only cellular networks in the country, although Vodafone has also partnered with TelstraClear to resell its mobile offerings.
•Vodafone took the number one spot in mobile subscribers in New Zealand back in 2003 and now holds 55% of the subscriber market.
•TelstraClear expects to launch Unplugged, its first high-speed mobile broadband and voice service, by mid-2007.
•A fourth player, Econet Wireless New Zealand (EWNZ) was, by late 2006, in the process of rolling out a network.
•The New Zealand mobile market is now approaching saturation and mobile subscriber growth will taper off significantly in 2007 and 2008.
•Both Telecom and Vodafone launched 3G offerings during 2005, and in September 2006 Vodafone launched its upgraded HSDPA mobile broadband network capable of significantly faster speeds. Telecom plans to launch its upgraded EV-DO Revision A network by the end of 2006.
•Mobile technologies are not well suited for mobile data beyond certain niche markets. While these networks can handle high-speed data, it is unlikely that this will be able to be achieved at prices low enough to penetrate the mass market.

Broadband, Internet and data
•During 2006 the trend of ISP consolidation slowed; however, moving forward into 2007 and 2008, commoditisation of products is likely to see the speed of ISP consolidation pick up once again.
•The ISP market is expected to further consolidate beyond 2006, as more ISPs will financially struggle to survive.
•A growing number of wireless broadband players, including Woosh Wireless and CallPlus are also making some inroads into the market and this trend will continue into 2007.
•In August 2006 Orcon was preparing to deploy a high-speed broadband ADSL2+ network that will feature IPTV services.
•Wireless broadband remains very much a niche medium in New Zealand with usage restricted principally to regional areas outside the coverage of fixed ADSL and cable services.
•New Zealand’s data market continues to outpace other market segment in terms of growth and market share.
•Life is getting tougher for the ISPs as customers migrate from higher margin dial-up services to the much lower margin broadband services.
•The key to success in this market is the adoption by the Broadband Service Providers (BSPs) of the triple play model, delivering voice (VoIP), Internet access and video (broadband TV) over the one broadband connection.
•Driven by broadband, revenue growth in the data market is expected to increase to 11% in 2007 and 12% in 2008.

Broadcasting
•A number of interesting urban and rural fibre network rollouts in New Zealand are laying the foundation for high-speed networks capable of triple play service delivery.
•The progressive introduction of ADSL2+ broadband will enable the delivery of new services on top of Telecom’s broadband infrastructure. Services delivered over its NGN in 2007 will include VoIP, video calling, converged fixed/mobile offerings, Interactive television and VoD.
•Vodafone’s merger with ihug in late 2006 opens up some exiting opportunities in the area of fixed-to-mobile convergence.
•Broadcasting’s ad revenues are gradually being squeezed due to falling audiences and rising costs.
•In late 2006 New Zealand lagged behind most of the developed world in the transition to digital television. By this time in New Zealand, it was only being broadcast by pay TV operator SKY on a satellite platform in the DVB standard, which also rebroadcasts some radio services.
•In June 2006 the government anticipated transmission of FTA digital TV would begin early in 2007.
•SKY Network Television (SKY) is the only major service provider in the market. SKY has a retransmission agreement with TelstraClear under which TelstraClear operates its own network and manages all aspects of customer service.

Paul Budde
http://www.budde.com.au
BuddeComm operates the largest, continually updated, telecommunications research service on the Net

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