Still ripping us off after all these years

- Murray Horton

Our old mate Telecom was given a Special Award for Monopoly Profiteering by the judges of the 2003 Roger Award for the Worst Transnational Corporation Operating in Aotearoa/New Zealand. Telecom has never actually won the Roger but it’s always been a contender. Mind you, if I was the judge, it would win every year. But that’s another story.

We haven’t devoted much space to Telecom in Watchdog for several years, so I thought it was about time that we did. Its ownership has changed significantly since the original two US phone transnationals bought it, back in 1990, but it is still very definitely a foreign-owned and controlled company, with more than 75% of the shares owned overseas. According to Telecom’s latest Annual Report (September 2003), US interests hold 33.7% of the shares (the three biggest shareholders are American); Australians hold 17.1%; British 15.9%; other Europeans 2% and Asians 7.7% (quoted in the Independent, 19/11/03). New Zealand ownership ranges between 20-25%.


Telecom is no longer an absolute monopoly but it is most reluctant to cede any ground to its rival telecommunications transnational corporations (TNCs), such as TelstraClear. One main area where Telecom exploits its near monopoly is what it charges competitors to "interconnect" with its network (which is a monopoly everywhere in the country except Wellington and Christchurch, where TelstraClear has built its own network). In his first ruling, in November 2002, the Telecommunications Commissioner, Douglas Webb, set the interconnection fee at an average of $1.13 per minute – Telecom had been charging TelstraClear $2.65 per minute. In June 2003, the Commissioner ordered Telecom to offer TelstraClear a 16% discount on the standard retail prices of 98 services that the latter wanted to buy from Telecom (which promptly appealed to the Commerce Commission).

The landmark case was the September 2003 draft ruling by the Commissioner that Telecom must "unbundle" its local loop and make its network available to competitors (for a rental, of course). This decision was not final but was reaffirmed by Webb the next month. A cost benefit analysis for the Commissioner conservatively estimated that, as a result, there would be net benefits to consumers of $204 million over five years. This would mainly come from falling prices.

Unbundling is seen as vital if New Zealand is to benefit from the full spectrum of broadband Internet services that are now available. Telecom is seen as offering an unattractive and inordinately expensive broadband service, with the result that, as of October 2003, it had attracted only a tiny fraction of the 100,000 households that it had promised it could sign up. The best summary of why Telecom’s broadband service is so unattractive to customers comes from a Listener article ("Band Of Hope", by Russell Brown, 18/10/03). He concludes: "By these lights, the Telecommunications Commissioner’s recent recommendation that big chunks of Telecom’s network should be unbundled and made available at a wholesale rate to other companies is realistic and welcome, however much it tramples on the company’s property rights. If Telecom can’t deliver an attractive broadband product over its own network, then it is surely time that somebody else got a chance". An overseas expert on local loop unbundling described Telecom’s broadband products as "bonsai broadband…It’s not just that it’s stunted growth, it’s that it is carefully trimmed to the size Telecom is nurturing it to be. It’s how they control the market. The more I look at the offers (broadband) in the market here, they are appalling" (Ewen Sutherland, Press, 30/8/03; "Telecom blamed for delay in opening up broadband market").

Southland is one of three regions where the Government is sponsoring broadband high speed Internet access. It went with a wireless system, a rival to Telecom. Local leaders are outspoken in their condemnation of Telecom’s monopoly in their region. Steve Canny, development and policy manager for special projects at Venture Southland, said: "If we look at the incumbent telco (i.e. Telecom) as an example, we’ve had probably the best part of 11 to 12 years of non-reinvestment in the network, and that asset’s been essentially sweated over that time. Our exchange systems and basic telephony network have never been upgraded to the point where they can handle data effectively. In our region, around 36% of rural dwellers can’t make an Internet connection – we just couldn’t continue year after year with that level of service. Our region certainly didn’t even feature anywhere on the radar screen for JetStream, or any of the asymmetric digital subscriber line (ADSL) products, and all of a sudden we have almost ubiquitous JetStream services in our urban areas throughout our region. Competition, or even the threat of competition, is very clearly the driver of that deployment. It (competition) has provided opportunities for innovative technologies to be deployed and also a significant reduction of price" (Press, 19/11/03; "Broadband expected to boost growth"). And how wonderfully apt it is that a leading local official in the Scottish part of the country should be called Mr Canny, I might add.

Telecom, of course, strongly resisted this. When the Commissioner’s final hearing opened, in November 2003, it described those seeking the unbundling of its local loop as "free loaders" (Press, 11/11/03; "Telecom: under siege over loop"). It should be pointed out that unbundling is not something new, it has already been done in other countries. There is an irony in all this. Telecom fiercely resisted TelstraClear’s attempts to access its network. But in Australia Telstra unbundled its network several years ago and Telecom’s Australian subsidiaries have access to it. In fact, they depend on it for their Australian operations. Annette Presley, of rivals Slingshot and CallPlus, said: "The irony is that Telecom, through its Australian arm AAPT, gets to offer Australians choice of home phone provider – all because unbundling has taken place" (Press, 16/2/04; "’Anger at NZ phone charges’", Michael Herman).

In The End, The Commissioner Unbundled Only Himself

But when the Commissioner’s final recommendation was delivered to the Minister of Communications, immediately before Christmas 2003, Webb had done a complete about-face. "He would not, after all, recommend unbundling: only a designated form of bitstream access that obliged Telecom to offer a high-speed digital subscriber line (DSL) date service to competitors at a set wholesale rate. Had this emerged in the Inquiry’s original findings, it might have been cause for disappointment from the proponents of bold regulatory action – but not bewilderment. After all, ordering an incumbent telephone company to open its lines is a fairly radical step. And although unbundling has been a screaming success in such places as Japan, the results have been more tepid elsewhere. Some analysts hold that simply handing TelstraClear access to Telecom’s network means that TelstraClear will have no incentive to further invest in its own network.

"But the Inquiry had apparently considered these downsides and – in what was by all accounts a deliberately conservative analysis – still concluded that unbundling offered substantial benefits. So what happened? Webb credited a ‘market-led solution’ announced by Telecom between the draft and final reports, which will see Telecom partially free up access to circuits used to deliver data services to major users. This, he said, had made sweeping regulation unnecessary.

"It seems odd. The corporate sector is relatively well served for competitive telecommunications offerings. It’s the consumers who don’t currently enjoy competition. To its credit, the Commission has focused on the most glaring problem: the market for high-speed DSL services, which Telecom, because it owns the lines to our houses, controls. Telecom has been unable or unwilling to make JetStream attractive to many of us. As a result, New Zealand, which once led the world in uptake of the Internet, has fallen far behind other developed countries in the move to broadband.

"But the proposed solution has problems. Telecom’s competitors will be able to offer a JetStream-like service over Telecom’s network, but it’s unclear what, if any, guarantees those competitors will be able to offer on the service. Worse, the Commission has dictated that the upstream speed (that is, from you back to the network) will be no greater than 128Kbit/s. On a good day, the upstream speed of Telecom’s JetStream is about three times that: so Telecom will be ordered to provide competitors with a service that is inferior to the one it sels to consumers… Even leaving aside the various conspiracy theories about the about-face, it is a strange solution indeed" (Listener, 31/1/04: Computers, Russell Brown; "Open up! Why the Telecommunications Commissioner has done an unbundling about-face"). Telecom’s Chairman, Roderick Deane, described the Commissioner’s recommendation as "realistic" (Press, 6/2/04; "Telecom upbeat on debt, payout", Marta Steeman).

In March 2004, the Commerce Commission took Telecom by surprise by announcing that it was being prosecuted for misusing its dominant market position vis a vis broadband. If the High Court finds Telecom guilty of having breached the Commerce Act, it could be ordered to pay a penalty of up to $10 million or three times the value of any commercial gain arising from the breach or, if this amount is not known, then 10% of turnover. Telecom reacted angrily, saying that the Commerce Commission was acting under a 1990s regime, which had been superseded by the 2001 Telecommunications Act.


Ernie Newman, the chief executive of the Telecommunications Users Association of New Zealand (TUANZ), explains why so many people are reluctant to sign up to Telecom’s broadband Internet service. "First there is a cap on it. Second, if you exceed the cap, the rate that you pay for the excess is absolutely huge. They penalise you out of all proportion" (Press, 23/9/03; "Users tackle Telecom"). An online petition calling on Telecom to drop its data cap drew several thousand signatures.

And Telecom continues to try and profiteer from its dealings with its competitors. When the Labour government sold Telecom to American phone companies, in 1990, it included the Kiwi Share. The 2001Telecommunications Act revamped it as the Telecommunications Service Obligations (TSO) and, from 2003, the cost of it is to be shared between all the phone companies in NZ (previously, Telecom, as the monopoly, carried the lot). Telecom estimated that the TSO cost it $425 million per year, and that its rivals should pay their share of that sum. But the Telecommunications Commissioner, in a draft ruling, slashed that figure to $73.4 million. Quite some difference. The 2001 Act requires the Commissioner to calculate the TSO every year. In December 2003 the Commissioner ruled that the TSO cost $34.7m for the six months from December 2001 until June 2002 (so he’s only 18 months behind the play). The Commissioner calculated that Telecom has about 75% of the market and provided phone services to 68,689 unprofitable customers. He ruled that Vodafone’s share for that period was $6.6m and TelstraClear’s $3.1m. In February 2004 Vodafone (which has stayed right out of the battles between Telecom and TelstraClear and co) filed an appeal. The Commissioner calculated that Vodafone has 19% of the market.

Profiteering and monopoly run hand in glove. "Telecom users have recently received a notice or two informing them that $6 late payment charge may be levied on overdue accounts…. The unilateral imposing of such a charge emphasises the strong monopolistic characteristics of the business. Companies with virile competitors are normally more careful about annoying their customers. Although such a move is positive for Telecom’s financial performance, you have to question how much more the company can go to its residential customers to lift profits. In the last five years or so, Telecom has subtly extracted value from its customer base at the edges – boosting hugely the non-regulated wiring maintenance part of residential bills, introducing charges for directory, bringing the billing cycle forward a week, doing away with part-minute charging for residential tolls, and devaluing the Talking Points loyalty scheme. Shareholders should admire the strength of the franchise, but customers may soon start to notice they are being taken for granted" (Press, 9/4/03, "Direct-debit push for customers", Roger Armstrong).

In another one of his weekly Market Pulse columns in the Press, Armstrong observed that the drop-off in competition from TelstraClear (which stopped building its own network after Wellington and Christchurch) directly led to Telecom increasing its charges and reducing its services. "Arguably the absence of an aggressive competitor has also helped with Telecom’s cost-cutting" (Press, 13/8/03, "Boring rump powers Telecom profits"). The most recent of these increases was the February 2004 increase in residential line rental charges by about 50c per month (coming on top of a 15% hike in line rentals in 2003). As pointed out by TelstraClear’s public affairs manager, Matthew Bolland: "Telecom’s costs in providing home phone lines to New Zealanders have actually dropped with the recent announcement that competitors must pay Telecom more than $15 million a year to help deliver this service" (Press, 30/12/03; "Telecom to raise telephone line fees", Michael Herman).

Campaign By Rival Telcos

When TelstraClear (under its previous name of Saturn) was building its own network, in Wellington, Kapiti Coast and Christchurch, Telecom cut its residential phone line charges literally street by street in those centres to match or undercut its rival. Telecom didn’t cut prices for its customers anywhere else in the country and the reduced rates still apply today. In February 2004 TelstraClear, CallPlus, ihug, Slingshot and Compass launched the Call for Change campaign. They set up a tollfree line for people to register their protests at this predatory pricing inequity and 61,000 did so within a couple of weeks. People outside those centres pay $84 more per year for their residential line rentals. Telecom dismissed this campaign by the rival telecommunications companies as "a red herring" and "unscientific" (Press, 12/2/04; "Telecom hits out at claims"). Telstra Clear came out fighting, slashing its broadband prices, in two consecutive months, in the fiercely contested areas of Christchurch, Wellington and Kapiti. And it announced cheap international toll calls to three regions of the world.

In March 2004, Telecom launched a counter-attack, which turned into a public relations nightmare. It offered customers of its rivals a 25% discount on toll calls from their home phone if they switched to Telecom. But it did not advertise the offer as being available to its own customers and it was inundated by thousands of them angrily demanding the same deal. The backlash was so severe that Telecom had to extend the offer to all its existing customers.

In 2002 Telecom tried to get away with outrageous increases in charges for rural new connections (up from a flat $61.88 to as much as several thousand dollars in newly defined "low density areas" that might be only a few kms from major cities). After considerable public uproar, this was dropped to a flat $500 – still an increase of several hundred percent.

For a textbook example of profiteering, look at mobile phone charges (and Vodafone is equally guilty). "Critics say Vodafone and Telecom do not compete much on price but more on the services they offer. Companies are beginning to balk at the rising costs of calling from a fixed line to a mobile phone. TUANZ’s Chief Executive, Ernie Newman, said the costs of calls from a fixed line to a mobile phone ‘is the most common form of complaint among major users – the mushrooming costs of fixed to mobile calls’. The dramatic fall in toll call prices in the past few years had not been matched by a big fall in mobile phone call charges, he said. Calling from a fixed line to a mobile phone is 12 to 17 times dearer than making a local fixed line call to another fixed line. Telecom raked in $292m in revenue from people calling mobile phones from a fixed line in the June 2003 year. Telecom’s revenue from mobile to mobile amounted to another $778m. All up, it generated more than $1b from mobile phones…" (Press, 13/12/03; "Our expensive love affair", Marta Steeman).

Telecom is back in the black. It made a $365 million profit for the half year ending December 2003 (a 21% jump in half-year profit). Theresa Gattung, the Chief Executive Officer (CEO), was paid $1.77m for the 2002/03 year, and is in line for a possible increase to $2m per year. The annual dividend payout to shareholders will most likely be increased from 50% of annual net profit to as much as 75% (although it is not likely to go back up to the nearly 100% dividend payouts of the Roaring 90s).

Corporate Highhandedness

There are plenty of other examples of poor service and corporate highhandedness. Just before Christmas 2002, Telecom’s Internet Service Provider, Xtra, cut off 8,000 customers without warning. It was enforcing contract terms that customers must not access their Xtra e-mail through a secondary Internet service provider (ISP). It didn’t bother to inform its customers or affected ISPs. Chris Milson, principal rural fire officer for the Waimea Rural Fire District, said: "We’re a customer, we pay every month when our account is due and expect to get a service" (Press, 24/12/02; "Xtra pulls plug on 8,000 customers"). In August 2003, Telecom announced that a software problem had knocked out more than half of its public payphones around the country and that the problem could take some time to fix. Of course, this disadvantaged the poor who can’t afford to have their own phones. Plus niche businesses such as backpackers’ guesthouses in central cities, where there is heavy demand for public phones. Well, they could always buy cellphones, couldn’t they? Telecom ones, of course. On the subject of which – in October 2003, Telecom Mobile was fined $11,260 for using false or misleading advertising to lure rivals’ customers and even those of its own 025 network onto its new 027 network. It pleaded guilty to the charges.

All of which goes to show that a leopard never changes his spots. Once a predator, always a predator. Monopoly, profiteering, shoddy service – these have been among the hallmarks of Telecom since it was, firstly, corporatised and then sold offshore as a cash cow. And what has this "Centre Left" Government done about it? SFA, beyond creating the Commissioner, to encourage "competition" between phone TNCs. So now we get a choice of leopards. Two cheers for The Market.

It takes a lot of work to compile and write the material presented on these pages - if you value the information, please send a donation to the address below to help us continue the work.

Foreign Control Watchdog, P O Box 2258, Christchurch, New Zealand/Aotearoa. August 2003.


greenball Return to Watchdog 105 Index