The state of telco play, 2016

The Commerce Commission's latest annual report on the state of our telco markets came out last week. At the time I was too busy on other things to give it a good read - and if you're also up to your eyes, then there's a media release and a cheat sheet infographic to give you the gist - but I've now got round to it and, like the previous ones, it's well worth a look (my comments on earlier ones are here and here).

Before getting into some of the details, I'll just say - again - that we have a daft system for regulatory review of what's happening in our markets. The Telecommunications Commissioner, who is part of the Commerce Commission, is required to conduct and publish reports on what's going on in telco markets (under s9A of the Telecommunications Act 2010), but the Commerce Commission itself is forbidden to do it in any other markets (under the courts' reading of the Commerce Act). There are people in the bowels of MBIE looking at the discrepancy at the moment: let's hope they come down on the sensible side of the fence.

And there's a good example in this latest report on how proactive enquiries into the state of competition might work. The report was looking at market shares in the mobile market (p36):

We have noted 2degrees’ very small share of business market revenues in prior reports. We commissioned UMR to undertake a survey of the business mobile market in the latter half of 2015 to gain a better understanding of the market and check if there were any barriers to expansion. Overall, the survey revealed no evidence of anti‑competitive behaviour.

Excellent - the Telecommunications team found something odd that might have been an issue with competition, investigated it, and was able to blow the All Clear. Exactly what should be happening in every other sector of the economy.

This year's report is mostly a record of solid, ongoing progress in the sector, with greater uptake, faster speeds, decent levels of consumer choice, and somewhat lower prices (more obviously lower when quality-adjusted). Your interests may be different, but here are a few thoughts that occurred to me.

This is the graph showing how broadband download speeds have been improving.

All well and good, but the set of comparators looked a bit idiosyncratic. Where are the smaller OECD economies like Denmark or Ireland or Switzerland that we might normally want to match ourselves against? And why Malaysia, of all places? So I went to the original Akamai report these numbers came from, and I was able to find a table of download speeds for a wide range of Asia-Pacific countries (including us), and also a table of European speeds.

By Asian standards, we're doing pretty well, especially when you consider that some of the very densely urbanised countries like Korea, Hong Kong and Singapore must be a good deal easier to serve, compared to us having to trench our way up the Cobb Valley. But by European standards, we're not such hot stuff, even when compared with long, skinny, thinly populated places like Norway and Sweden which must have similarly challenging geographies.

If we were a European country, we'd rank only 21st on that table (behind Poland, ahead of France). And globally we rank 41st in the Akamai universe - not so flash. We'd expect to be somewhere in the top 20 on most other economic measures (the other day we came 16th in the latest World Competitiveness Rankings, for example). So by all means let's be happy that speeds have improved, but also let's be aware that we are (for whatever reason) still well behind the sorts of speeds our kids on OE can get (unless they're in Australia).

There was also a fascinating chart showing the extent of pent-up demand in New Zealand for decent online content, after years of limited choice, long delays, and high prices. The little arrow on the chart shows the immediate and ongoing surge in data consumption when Netflix arrived. I can only begin to imagine the existential angst in the strategic planning units of our telco and media companies: some current business models can't hold.

Finally, on the regulatory front, the report noted (p30) that

The wholesale cost of terminating a phone call on a mobile network is called the mobile termination rate and is regulated in nearly all countries. We last reviewed the mobile termination rate on 5 May 2011, and the last regulated reduction prescribed in that determination was to 3.56cpm (excluding GST) on 1 April 2014. The ACCC last year set the mobile termination rate for Australia at A1.7cpm, and as at July 2015 the weighted average for Europe was 1.22 eurocents per minute.

There is no obvious reason why our mobile termination rates should be well in excess of those overseas - at current exchange rates, roughly twice Australia's, and roughly 75% higher than Europe's. The technologies are the same, and on some opex costs we should be cheaper (our wage bills are lower, for example). I'm no great fan of extra regulation, and still less of extra price control regulation, but if the subtext of "We last reviewed the mobile termination rate five years ago" is "And, you know, it's about time we had another look", I reckon the Telecommunications Commissioner is on the right track.

The future of telco regulation

No doubt you've seen all the coverage of the government's high level decisions on regulation of the telco sector from 2020 onwards (if not, the media release is here, the once-over-lightly summary is here and if you want to mainline the hard stuff go here).

It's a good set of decisions, though a lot of detail is yet to come, and there'll be another round of consultation on options. The big (and expected) decision is that both fibre and copper based internet services will be regulated as utilities, in much the same way as electricity lines businesses are today. That changes the way copper based internet is priced today, and properly so - as I argued here, the 'TSLRIC' model for pricing copper was good for one purpose (enabling efficient competitors to get into the game) but not adequate for regulating a copper provider's above-normal profits.

The media reaction is all over the new 'utility' model. But there's one part of the decisions that hasn't been picked up much, and here it is:

However, there is also the option for a more light-handed ‘backstop’ regime. The threat of regulation combined with requirements to release financial and cost information could work as an effective incentive to keep prices at reasonable levels. While this isn't the Government’s preferred approach at this time, we will be interested in discussion on this point. 

I think this is an option that should be explored further. I'm not sure that an information disclosure plus hidden knuckleduster regime would cut it on its own - it might, and maybe existing practice could be strengthened, but the precedents to date aren't great - but there very badly needs to be some intermediate, simpler, faster, less complex and less expensive alternative to the 'building block' model of utility regulation that's being proposed.

The regulatory regime would be much better if, for example, there was an 'RPI minus X' option somewhere along the way - where suppliers are allowed to raise their prices by the Retail Price Index (this is UK terminology originally, so that would be our Consumer Price Index), less some amount 'X', a plausible enough guess at what sort of productivity and efficiency gains the supplier can wring out of the business.

There's nothing inherently wrong with the 'building block' approach. Arguably, it gets closer to a supplier's 'true' costs and profits than anything else. Applied fairly and consistently, it can form a good basis for an effective regulatory compact between regulator and regulatee, and can protect consumers from profiteering. But as anyone who's had anything to do with the process knows, it's a beast of a thing to construct and maintain (or even understand, in its thornier thickets). If we end up there, we end up there, but we should really put some serious effort into intermediate or alternative options - particularly as, at some point, we as a four and a half million people economy ought to start using more "cheap and cheerful" policy regimes, rather than the industrial strength superstructures a US or a UK can afford.

A final comment: the government is keen on keeping competition up to the mark in the mobile market, and is thinking about things like mandating the price competitors pay to access incumbents' mobile towers. And it said

We will consult further on encouraging sharing of infrastructure, and making sure the Commerce Commission has the tools it needs to investigate the market.

I'm hoping the last bit of that sentence means that the government is finally getting its head around the desirability of the Commerce Commission being able to have a proactive look at the state of competition in any given market - a "market studies" power, in the jargon. I've been banging away at this for ages - my latest efforts are here and here - as have others (notably our Productivity Commission). Hopefully this latest telco exercise has finally nailed the absurdity of the country's competition watchdog not having the legal authority to do a key element of its job.

There has to be a better way. And there is

I'm convinced there's a better way to get a good fix on some of our more contentious, and important, regulated telecoms prices. Let's deal to some jargon first, and then we'll get properly underway.

If you've got broadband, you get it from an Internet Service Provider (your ISP). And chances are it arrives over the copper wire phone line to your house. You could be on wireless broadband, or you might have signed up for the flashy new fibre network that's being rolled out, but most of us are still on the old copper based system. It's owned by Chorus, and your ISP pays Chorus for the use of that copper line from your house to the nearest telephone exchange. That service is known as the Unbundled Copper Local Loop, or UCLL. ISPs can put their own equipment in the exchange and take the feed from there, or they can rent some gear from Chorus instead of providing their own: that's the Unbundled Bitstream Access service, or UBA.

And finally - and this is where things come closer to your wallet - you've likely noticed that your ISP has said it'll be raising its price to you by $4 a month or so, because the Commerce Commission, which regulates the copper line UCLL price, is in the process of raising it from $23.52 a month (its first stab at the right price to charge) to $28.42 a month (its estimate after going through a full cost modelling exercise).

There's a consultation process going on before the Commission's proposed UCLL goes final (all you can eat here). As part of that process, Spark has come up with this graph, which shows how the Commission's proposed price compares with the price charged for the same service in a range of other developed countries.

You may have seen this already - the Herald's technology columnist, Chris Barton ran with it in a recent article, "Something rotten in our Commerce Commission", where among other things he concluded that "by a curious combination [of] free market ideology and caving to political pressure, it's [i.e. the Commission is] promoting monopoly power and a haughty "let them [the end-users] eat cake"." No doubt the Commissioners sacrifice children to the Great Werewolf, too.

In any event the graph does give you pause for thought about various aspects of how telco prices are set by regulation. My main point: I think there's greater room for using information on overseas prices as a guide to setting our own.

We do it a bit, at the moment: that "first stab" the Commission had at setting the price was required, under our Telecommunications Act, to be set by "benchmarking" against prices overseas. Unfortunately the benchmarking was tightly circumscribed in the Act, and had to be "Benchmarking against prices for similar services in comparable countries that use a forward-looking cost-based pricing method".

You can understand the logic. You wouldn't want prices to be set here solely on the basis of countries that weren't at all like us (eg a highly dense conurbation like Hong Kong), hence the "comparable" test, and you wouldn't want prices to be imported into New Zealand that had all been plucked out of the air on some cockamamie basis. And that's a real risk: regulatory proceedings can easily get captured by one vested interest or another. Money politics can see incumbents' prices set on too-favourable terms; populist politics can set prices that don't cover incumbents' costs. So you can see why the legislation saw fit to use prices only if they were set in a particular way.

Trouble is, you can take intellectual purity too far. After filtering according to the Act,  the latest benchmarking exercise, for the UBA service, ended up with only Denmark and Sweden to look at, which left everyone feeling a bit uneasy. I doubt if even the framers of the Act would have liked a benchmarking process that featured only two smallish Scandinavian countries.

So why don't we take a different tack? Why don't we go the Spark route, and look at the whole range of prices overseas? It would make sense to keep some element of comparability, so we might want to restrict it to say the OECD countries, but even that would leave us with a largeish group of 33. Some prices may well be off, and unfairly tilted towards suppliers or consumers, but on average you'd be inclined to think that the truth will appear somewhere in the middle. You might worry that New Zealand has got some special features that make it impracticable to compare with the average overseas experience: people like to raise the "long and stringy" argument, for example (though you'd think places like Norway and Sweden are much the same). All I can say is that I've seen a lot of folks argue both sides of the "New Zealand is unique" case, and I still don't see a knock-out case for our conditions being completely idiosyncratic.

Regular readers - God bless both of you - will know that I've banged on before (for example here and here) about using benchmarking more extensively in our price regulation, and I'd like to see our revised telco regime, when it eventually materialises, reaching more often for the regulatory equivalent of Number 8 fencing wire. It may be low tech, but it's admirably cheap and serviceable.