Telecom Drops Its Bundle

- by Murray Horton

Watchdog has rather let Telecom off the hook in recent years, not devoting any specific articles to it (other than Sue Newberry’s specialised analysis of its dubious accounting practices) since 105, in April 2004, (“Telecom: Still Ripping Us Off After All These Years”, by Murray Horton, which can be read online at As it is the only transnational corporation (TNC) to have been a finalist in virtually every annual Roger Award for the Worst Transnational Corporation Operating in Aotearoa/New Zealand since the Award’s creation in 1997 (although it has only actually won it once, in 2004), we have left it to the annual Roger Award Judges’ Reports, not all of which have been published in Watchdog, to catalogue the crimes of this corporate recidivist.

So the time is long overdue to devote another article to Telecom and with good cause, because 2006 has seen a major development in the never ending saga of its perfidy. For year after year after year Watchdog (and many others, including the mainstream media) has chronicled Telecom’s cynical exploitation of its 80% monopoly over the national landline network (which is still comprised of good old copper wire, another example of how Telecom has put profits over investment in its network). Nowhere has this become more glaringly obvious than in the area of broadband (high speed internet), which is the latest hot topic and one which business tells us it must have in order to reclaim New Zealand’s place in the sun. Mexico, the only other Organisation for Economic Cooperation and Development (OECD) member not to have unbundled the local loop (opened up its national landline network to competitors), is also the only OECD member to have more expensive broadband than NZ. And Telecom’s broadband speeds are light years slower than what is on offer overseas, with NZ one of the few OECD countries to have to endure data caps as a matter of course.

Nor is Telecom keen on extending broadband to costly and unprofitable sectors, such as rural New Zealand. The Government announced that rural broadband was a priority and put up money for that purpose. What happened next was succinctly explained by Dave Stanton of Geraldine in a letter to the Press (25/11/05): “The whole country was deceived by Telecom that the Government’s money would bring broadband to 90% of farmers and rural dwellers and all rural schools. Instead, after receiving the money, Telecom redefined rural to mean all those outside the main urban centres and then sold broadband to country towns where it was profitable for them to install it anyway”.

High speed is a relative term and I speak from experience. Our Internet Service Provider (ISP) is a small, Christchurch-based one, which contracts its broadband services from Telecom. Conversion to broadband, in 2005, led to bulk electronic mailouts to the numerous e-lists that I deal with suddenly becoming several hundred times slower than under the old dial up regime. This is is caused by our outward e-mail now going through a different server, namely Telecom’s Jetstream one in Auckland, which imposes a strict limit on the number of e-mail addresses that it will process at any one time. Our ISP could offer no solution and we ourselves only fashioned a partial one by getting a second e-mail address (but that doesn’t work for the CAFCA e-list, which has too many recipients. So, I can literally ride my bike into the city, do my business and come back to find it still processing the bulk mailout to that list). So that’s our, indirect, experience with Telecom’s broadband. On the other hand, just before the forced unbundling became public our ISP suddenly cut our monthly broadband bill and increased the capacity – the catch was a non-negotiable condition that all our toll calls must be via Telecom (or our broadband bill would go up). This article is about unbundling, but Telecom is still very much into bundling, or in our case, rebundling (our tollcalls had gone through TelstraClear).

Telecom Turned A Deaf Ear To All The Warnings

As everyone now knows, the announcement of a new regulatory regime forcing Telecom to unbundle the local loop was supposed to be the centrepiece of the Government’s 2006 Budget – but was leaked in advance by a Parliamentary messenger to his mate in Telecom, so the Government was forced into a premature ejaculation. By late June the negative reaction to this had wiped out about $3 billion of Telecom’s worth on the Stock Market – the share price had fallen more than 25% to a 13 year low - as shareholders who had profited mightily from that goldplated monopoly dumped the stock once the Government called a long overdue “time’s up”. One commendable effect of this crash in Telecom’s share price was that it rendered worthless the multi-million dollar share options given to senior executives, including Theresa Gattung, the Chief Executive Officer (CEO). Their collective loss is estimated at $5.7 million. Perhaps we should have a whip round.

If Telecom didn’t know that regulation was coming, then it had only itself to blame. The Government, which is extremely slow to regulate Big Business in any way, had finally tired of Telecom’s endless excuses and prevarications. To use an ironically oldfashioned communications metaphor, it had telegraphed its intentions (perhaps it should have texted them) and from the highest possible level. The Prime Minister, Helen Clark, had said in a February 2006 Parliamentary speech that New Zealand’s speed of uptake of broadband was unsatisfactory and improving that situation would be one of the Government’s top three priorities, promising urgent legislative initiatives to deliver “faster Internet access and at more competitive prices” (Press, 21/2/06; “Govt vows action on internet”, Michael Herman, Plugged in”). She never once mentioned Telecom but she didn’t have to.

Small New Zealand telecommunications companies were running a high profile and aggressive campaign to force Telecom to unbundle the local loop. The issue had achieved critical mass amongst the capitalist class and its media mouthpieces. Telecom, specifically in relation to broadband, had become the company that everybody loved to hate and it was deemed politically correct to bash it. The morning after the March 2006 Auckland event to announce the winners of the 2005 Roger Award (in which Telecom came a mere fourth), the chief judge, John Minto, did a radio interview with one of the best known loudmouth talkshow hosts, the sort of interview that can be quite hostile. When I asked him how it went, John said that as soon as he mentioned Telecom, the DJ “started shouting ‘Open up the broadband!’”. So the time was ripe for the Government to take Telecom down a peg or two (three would have been better).

But Telecom (just like our oldest mate, Comalco) is a TNC very much used to getting its own way with governments and politicians. It had fought very hard to retain control of its national landline network monopoly and had become both arrogant and blind in the process. There was no trick too low for it to stoop to. And why not? One constant factor since it was sold overseas, in 1990, had been that the Government was its friend. “The Government seemed to believe that Telecom would behave as if capitalism never happened” (Listener, 20/5/06; “Long time coming: Everything you always wanted to ask about local loop unbundling but were afraid to ask”, Russell Brown). The Telecom lobbying machine was legendary. In the late 1990s CAFCA was involved in organising a Christchurch seminar devoted to Telecom. One of Labour’s new MPs told it that the very first person who came to see her when she arrived in Parliament was a Telecom lobbyist. Sometimes the greasing of influential palms was a little too blatant, as when the State Services Commissioner ordered senior public servants to return iPod music players given to them by Telecom as 2004 Christmas presents. However, this was just a hiccup in the profitable business of ensuring it had the ear of Wellington’s movers and shakers.

Gattung’s Threats Bought Time

Back in 2003 it succeeded in persuading the Telecommunications Commissioner, Douglas Webb, to reverse himself and not recommend unbundling the local loop but to settle for a lesser “market-led solution” (see the section headed “In The End, The Commissioner Unbundled Only Himself” in “Telecom: Still Ripping Us Off After All These Years”, by Murray Horton, Watchdog 105, April 2004 which can be read online at Telecom’s CEO, Theresa Gattung, said that to allow unbundling would have given Australia a “free kick”, and she played the patriotic card, saying that the Australians already owned the railways and several billion dollars worth of other NZ businesses (Press, 21/4/04; “Unbundling a ‘free kick’ to Aust – Telecom”, Marta Steeman).

The sight of Telecom pretending to be a New Zealand company battling against those big bad Aussies was simultaneously nauseating and hilarious. In this case, patriotism definitely is the last refuge of a scoundrel. And what is truly ironic is that, to paraphrase Don Brash, Telecom believes that there is a place for unbundling and it’s called Australia. Telecom’s Australian subsidiary has taken full advantage of the unbundling of Telstra’s local loop ordered several years ago by the Australian government.

Details of Telecom’s 2004 political lobbying didn’t become known until December 2005, following an Official Information Act request from the Press. In May 2004 Gattung wrote to Paul Swain, the then Minister of Communications, warning him that 30 cents could be potentially wiped off Telecom’s share price if unbundling was required. The letter reminded Swain that Telecom is the country’s biggest company, comprising more than 20% of the sharemarket, and that the Government superannuation fund was invested in it. Gattung threatened that Telecom would not invest in “next generation” network upgrades for residential customers if TelstraClear got access to its network and concluded by telling Swain to accept the Commissioner’s watered-down proposal. The heavying worked – despite Swain and the Ministry of Economic Development backing unbundling, he was overruled by his Cabinet colleagues and the “market-led solution” was preferred, thus buying Telecom another year. Ernie Newman, Chief Executive Officer of the Telecommunications Users Association of New Zealand (TUANZ) said: “The suggestion ministers would favour one company in this way over the national interest almost suggests a banana republic” (Press, 9/12/05; “Telecom threat to Government upsets Telstra”, Marta Steeman).

This led to screams on the Right, with PressBusiness columnist Gareth Morgan writing: “…The revelation, prised out under the Official Information Act, that Gattung threatened the Government with a collapse of the New Zealand sharemarket if local loop unbundling was permitted, is worrying. If such an outcome were true it confirms that through its Kiwi Share and special protection of Telecom, the Government has created a monster that has infrastructure of national significance at its mercy… In this case a responsible and competent government would either trust-bust this outfit or, heaven forbid, renationalise it. There’s only one thing more worrying than a legislated State monopoly, and that’s a private one. Having naïve politicians shivering in their boots because the head of New Zealand’s largest listed corporate spits the dummy over competitive consequences of deregulation reveals both particularly weak political leadership as well as Telecom exerting strong-arm tactics behind closed doors. That it’s taken 18 months for this bludgeoning to come to light calls for Telecom’s privileged access to Government to be terminated…” (Press, 17/12/05; “Telecom acts like a monster”, Gareth Morgan, Morgan On Money). Imagine the reaction if the call to “renationalise it” had come from someone on the Left.

TelstraClear is certainly no angel when it comes to political lobbying and using scare tactics on governments. Also in December 2005, its correspondence with the Government was released under the Official Information Act. Rosemary Howard, TelstraClear’s CEO, wrote to Jim Anderton, Minister of Economic Development, in April 2004. She pointed out that the US had lodged a complaint against Mexico, which had not unbundled, for not meeting telecommunications obligations under the General Agreement on Trade in Services (GATS) and the World Trade Organisation (WTO) had ruled in the US’ favour. “I consider that New Zealand is also not meeting its GATS obligations. Accordingly, New Zealand is risking being found guilty of a breach, which would cause significant damage to our reputation” (Press, 13/12/05; “Aust turns to network lobbying”, Marta Steeman). Howard also quoted a 2001 letter from the Assistant for US Trade Representative for Industry and Trade to the NZ Secretary of Commerce which said that the US believed that local loop unbundling would be in line with NZ’s commitments under the WTO’s Basic Telecommunications Agreement, and she said that any Free Trade Agreement between the US and NZ would require unbundling. Australia’s Trade Minister, Mark Vaile, did his bit for TelstraClear by writing to Jim Sutton, Minister of Trade Negotiations, to say that a decision not to unbundle the local loop would be contrary to the goal of Closer Economic Relations (CER) vis a vis free trade in services. New Zealand trade officials advised their ministers that not unbundling would not breach WTO, GATS or CER commitments.

Voluntary Target Missed; Deal Stitched Up With TelstraClear

For his part, the Telecommunications Commissioner issued plaintive requests to Telecom to open up its network to competitors. In June 2005, Douglas Webb said that Telecom “faced a choice to open up to competition or face more regulation, ‘continuing as we are is not an option’” ( Press, 28/5/06;”Telecom called on to open up”, Adrian Bathgate). But Telecom took no notice and carried on regardless. Why not? After all, that attitude had always worked for it beforehand. In November 2005 it filed for a judicial review of the Commissioner’s draft ruling that it had to provide a wholesale broadband service to TelstraClear. And, simultaneously, it announced that it would not be meeting a voluntary target of wholesale broadband customers (those getting their broadband service directly from another ISP retailer who purchases it from Telecom). This had been agreed with the Government in 2004, when the latter deferred on local loop unbundling and gave Telecom more time to regulate itself. This figure, of 83,333 wholesale broadband customers by the end of 2005, was a target that Telecom had announced in order to avoid regulation. It fell 20,000 short.

In January 2006, Telecom and TelstraClear did what “warring” TNCs always do - they stitched up a deal to suit themselves and lock out smaller competitors. They agreed on interconnection rates i.e what to charge for phone access to each other’s landline networks; Telecom agreed to provide limited broadband services to TelstraClear; and to pay it a one-off $17.5 million to settle several issues, mainly backdating the agreements on wholesale discounts and interconnection. Both agreed to drop multiple legal actions that had been used to delay and obstruct the other. “The worst part of the deal is that Telecom’s odious and arbitrary crippling of the upstream speed of broadband connections remains in place” (Listener, 4/2/06; “The elephant in the living-room: What to do about Telecom?”, Russell Brown, Wide Area News).

The Government was happy with the deal but the small ISPs certainly weren’t. Keith Davidson, Executive Director of industry lobby group, Internet NZ, called it a “duopoly stitchup…I’m sure it’s a deal that suits TelstraClear and Telecom. I’m not sure it’s going to result in a better deal for consumers” (Press, 17/1/06; “Small ISPs ignored in broadband deal”, Adrian Bathgate). Telecom then proceeded to present the small ISPs with a take it or leave it offer on wholesale broadband rates. Ihug and Slingshot, two of the feistier small fry, opted to leave it and instead applied to the Commerce Commission for access to broadband at higher speeds. Annette Presley, Slingshot’s CEO, said: “The wholesale offering they put forward is bullshit. It costs more, the speeds are slower, and they can’t guarantee quality of service. How can we put that to our customers?” (Press, 10/3/06; “ISPs reject Telecom’s terms”, Adrian Bathgate).

The Government Finally Had A Gutsfull

The most serious Budget leak in 20 years forced the Government to prematurely announce the compulsory unbundling in a hasty pre-Budget announcement in May 2006. It represents the biggest shake up in the telecommunications sector since the calamitous decisions of the 1984-90 Labour government to split the Post Office into three separate businesses, corporatise them and then sell Telecom to American TNCs. The Government finally had a gutsfull of Telecom. David Cunliffe, the Minister of Communications, said: “The evidence before us is that New Zealand is in the bottom third of OECD countries for broadband performance and is approximately three years behind the pack. This is not an acceptable or a sustainable position for a small, smart country to be in” (Press, 4/5/06; “$800m hit for Telecom, Govt acts after Cabinet leak”, Tracy Watkins and Vernon Small). Cunliffe said that he expected the necessary laws to be passed by the end of 2006; consumers would start to see the benefits in 2007 and changes would be fully in place by 2008.

“But the real curveball is what is called ‘naked DSL’ (Digital Subscriber Line). What that means is that you’ll be able to choose to have a copper broadband line without a dial tone. You save the $42 Telecom collects from us all as a kind of birthright and choose your own voice solution. It might be mobile (it’s a fair bet that Telecom Mobile isn’t as upset by events as the rest of the company, or an ISP-based phone service over your broadband line, such as Skype, or the ready and waiting (and quite excellent) ihug Phone. You’re the customer. You choose” (Listener, 20/5/06; “Long time coming: Everything you always wanted to ask about local loop unbundling but were afraid to ask”, Russell Brown).

Other key features include removing the existing speed limit on broadband upload; encouraging investment in other technologies, such as fibre optic cable; looking at whether Telecom should be blocked from price cutting to undercut competition (it has done this on a literal street by street basis in the past to undercut Saturn – now TelstraClear – when it was rolling out its own landline network in Wellington and Christchurch); and renegotiate the Kiwi Share – now called the Telecommunications Service Obligations – to improve broadband access in rural areas and provide faster broadband speeds.

Cunliffe didn’t rule out even more sweeping measures to split Telecom into separate retail and lines companies and when the Telecommunications Amendment Bill was introduced in June, it held open that possibility, specifically requiring Telecom to prepare clear accounts about its retail and wholesale business activities as if they were independent entities. He said that he wanted the Select Committee considering the Bill to seek submissions on the options of operational and physical separation. The Bill extends the powers of the Commerce Commission to regulate the telecommunications sector, gaining a new civil enforcement regime with fines up to $1 million for a breach of the accounting separation requirements and $300,000 in any other cases.

After the Government’s unbundling announcement it was open slather in the transnational corporate media’s business pages. For example: “Telecom is a greedy backslider more intent on paying out hundreds of millions to mostly foreign shareholders than giving Kiwi customers good services at a decent price…Yesterday’s financial results showed profits of $222 million in just the March (2006) quarter. Telecom will pay almost $2 billion in dividends over two years. Overseas shareholders own 75% of Telecom and they are standing under a shower of cash (its 2005 profit alone was $800 million. Ed.) …Telecom had its chance to provide better and cheaper services after escaping regulation in 2003. It should have known the Government tsunami was coming. Telecom blew it” (Press, 6/5/06; “Greedy Telecom blew its last chance”, James Weir, Comment).

The news just got worse for Telecom. Only days after the unbundling announcement, with Telecom’s share price in a freefall from which it has yet to recover, a March 2006 audio clip was made public of an astonishingly arrogant and honest Theresa Gattung telling business analysts in Sydney: “Think about pricing. What has every telco in the world done in the past? It’s used confusion as its chief marketing tool. And that’s fine. You could argue that that’s how all of us keep calling prices up and get those revenues. High-margin businesses keep them going a lot longer than would have been the case. But customers know that’s what the game has been. They know we’re not being straight up” (Press, 15/5/06; “Telecom’s cynical manipulation a tragedy for us all”, John Minto, weekly column). In the same audiotape, Gattung said that the Government was “way too smart to do anything dumb here” in relation to regulation (Press, 10/5/06; “ Clark criticises Gattung’s remarks”, Vernon Small and Tracy Watkins). Needless to say, this attracted a firestorm of criticism from the media and politicians, from Clark down. Gattung spent the next several weeks backpedalling and trying to explain that she had been quoted out of context. What she said seemed to be pretty clear to everybody.

The very next month the reality of having its precious landline network forced open to competitors was brought home toTelecom by the Commerce Commission. In June 2006 it made a draft ruling upholding Vodafone’s application to interconnect with Telecom’s network for free, enabling Vodafone to offer a home phone line over its mobile network. Specifically, the Commission provisionally ruled that: Vodafone has the right to use a mobile as an option for a landline sevice; that Telecom and Vodafone should not charge each other to receive local calls; and that Telecom cannot charge its customers a higher price to call a Vodafone landline. The Commission sees this as necessary for creating the much vaunted level playing field for competition. The Telecommunications Service Obligations (formerly called the Kiwi Share) committed Telecom to provide free local calls but specifically excluded calls to mobiles. However, the Commission ruled that a local call is defined by the number, not the network. This case was a classic example of Telecom’s filibuster tactics – Vodafone finally took it to the Commission after having been mucked around for two years. The Commission’s final decision will be released later in 2006.

Telecom is not without friends. The Government’s unbundling announcement was attacked as a confiscation of Telecom’s property rights by National, Big Business mouthpieces such as the Business Roundtable, the Shareholders’ Association and Federated Farmers (whose members hoping for a decent rural phone and Internet service must wonder just whose interests it is representing). But Telecom itself decided to shrug its shoulders and move on, or at least, that’s what Theresa Gattung said publicly: “We are not arguing to turn back time; we are not going to be obstructive; we are not going to mount rearguard actions; we are not going fight old regulatory battles; we are not going to hide behind legalistic arguments. We are New Zealanders. We are committed to New Zealand and New Zealanders, and we are acting swiftly to get traction right across the company with our new directions. Throughout Telecom, we are 100% committed to making the new environment work. Some of you are bound to be sceptical. But judge us on the evidence” (Press, 25/5/06, “Benefit of Telecom reform to take time”, Colin Espiner). Lend me your hanky please, I think I’m going to cry.

Telecom then proposed that two independent working parties be set up to coordinate the technical standards and implementation plans for competitors to access its network. Most of the larger ISPs indicated a willingness to attend but CallPlus and Slingshot, which have waged a high profile, high energy campaign against Telecom’s monopoly, announced that they will boycott. Slingshot’s boss, Annette Presley, said: “We’re looking for action and not just words, which is all we’ve seen so far. Until we see that, we’re not prepared to commit our time, energy and more money into a process with no tangible benefits” (Press, 21/6/06; “Slingshot refuses to go to Telecom’s party”, Adrian Bathgate). In June, the Commerce Commission granted CallPlus and ihug wholesale access to the fastest broadband that Telecom can provide. But at a price higher than what the Commssion granted to TelstraClear six months earlier, which was rendered academic by the stitched up deal signed between Telecom and TelstraClear in January 2006 (see above for details).

Deane Dumped; Will Gattung Be Told “You Go, Girl”?

Corporate hubris on this monumental scale demands a sacrifice and Telecom’s Chairman, Roderick Deane, announced his resignation as of July 2006 (after originally saying that he would leave in a year). This marked the end of an era, as Deane had joined Telecom as CEO in 1992, before making way for Gattung in 1999, being profitably kicked upstairs to Chairman. It also marks the twilight of one of the leading figures of the 1980s Rogernomics cowboy crony capitalism. Ironically, Deane is the subject of a just published sycophantic biography by one of the leading Rogernauts of that 1984-90 Government, Michael Bassett (who inflicts a bilious column on Press readers once a week). In typical fashion, the Press gave the book to review to the other Roger, the Business Roundtable’s Roger Kerr. Astonishingly, he praised it and Deane to the skies, claiming that Doctor Death was the second most important figure in that “revolutionary” era, after Roger Douglas.

Deane himself has never made any secret of his contempt for any form of State involvement in business, for example, saying that Government intervention in the early 1990s forced Telecom to use inferior cellphone technology (which means that Vodafone now leads the mobile market). “This is typical with what happens with Government regulation. Officials sound well-meaning, but they don’t know enough about the industry to make intelligent choices” (Press, 8/6/06; “Govt blamed for cellphone system”. James Weir). Of course, he blithely ignores the fact that he and his ilk did very nicely indeed out of a State policy that handed them publicly owned assets, such as Telecom, to be their personal cash machines.

“That change was essential at Telecom goes without saying, and the glee was widespread at the sight of its bloated arrogance being punctured by the network-unbundling announcement. The debate over the merits of using the regulatory approach to force its hand is now academic. It seems Telecom itself has grasped that point…But he (Deane) also represents a past that Telecom now needs to shake free of – one where confrontation, obfuscation, litigation and bullying have too readily been preferred to engaging with customers, regulators and, on the occasions when it might have been the best course, competitors…Theresa Gattung faces similar guilt by association with that tarnished past. It is little wonder that predictions of her departure are only mounting…” (Press, 6/6/06; “Telecom’s way ahead”, editorial).

Gattung is now New Zealand’s highest paid CEO, with a salary package approaching $3 million per year. Mounting demands from the business community and the media for her to join Deane in stepping down provide an ironic twist to that currently fashionable cry of “You go, girl”. “…There was little doubt that Telecom had largely brought this situation upon itself. It was widely seens as arrogant, obstructive and difficult to deal with. So far as consumers were concerned, it was happy to adopt the practice of telecoms companies everywhere and, as Gattung admitted, try to confuse them about the services available. It also wildly misread the mood of the Government at its performance, with Gattung over-confidently believing that regulatory intervention was out of the question. These are failures that can only be blamed on the company’s top brass. Despite yesterday’s announcement (of voluntary separation), one question Telecom still faces is whether the present leadership, and in particular Theresa Gattung, have the necessary skills to take it forward. The man who presided over much of Telecom’s success as CEO and Chairman, Roderick Deane, has already left the company. Whether others of the longer-serving executives, who might be seen as part of the old regime, need to go is something that should be decided quickly…” (Press, 28/6/06, “A new era ahead”, editorial). However, in July 2006, Telecom’s new Chairman, Wayne Boyd, announced that Gattung will remain as CEO for another 12 months, to lead the company through its involuntary transition.

The Big Split: Jump Or Be Pushed?

Telecom has tried desperately to remain in control of the agenda, as it has always been able to do in the past. Just one day after the Government introduced the Telecommunications Amendment Bill, which allows for the possibility of Telecom being split into separate lines and retail companies, Gattung announced that Telecom will voluntarily go beyond the Government’s requirement of accounting separation and separate itself into a wholesale and retail division, although ownership and management will not change. Wholesale will look after Telecom’s national copper phone network, selling wholesale phone and Internet connections to Telecom retail as well as its competitors. Retail will sell phone and Internet connections to consumers and businesses, much as it does now. Gattung said that Telecom will take the unusual step of consulting competitors about this internal restructure and pledged that Telecom will be transparent in dealings between the divisions, as opposed to past practice where it favoured its own retail services, to the disadvantage of competitors. Several overseas models of voluntary separation exist, for example, British Telecom, which involves a different company with a different name and separate board of directors, although the company remains within the British Telecom group (Telecom will have noted that British Telecom’s profits went up after it was unbundled, because that led to greater use of its lines).

However, Gattung said that although a different brand is possible, another board is not. “This is operational separation, not structural separation, that bit is clear” (Press, 28/6/06; “Telecom to split”). She said this is evidence of Telecom’s (involuntary) change of heart, as promised. Competitors praised this move towards openness but said that it doesn’t obviate the need for the new regulatory and enforcement provisions in the Telecommunications Amendment Bill. “Asked if Telecom jumped before it was pushed, Gattung replied: ‘Let’s just say we’re reading the tea leaves’” (ibid). Cunliffe, however, said that Telecom’s pre-emptive move may not go far enough to satisfy the Government and he would have to consider the company’s proposal in detail. Andrew White, a Goldman Sachs JB Were analyst, contradicted Gattung, saying that Telecom’s proposal appears to be service separation between wholesale and retail, rather than operational separation. The latter requires the network and wholesale units under a separate structure from retail. He predicted an inevitable fall in Telecom’s earnings and therefore its dividend to shareholders of an astronomical 90% of profit: “We see potential for a more adverse outcome than is proposed by Telecom” (Press, 29/6/06; “Dividend cut ‘inevitable’”, Gareth Vaughan).

The country has every reason to be sceptical about Telecom when it comes to “voluntary separation” – the company first voluntarily separated into different operating companies when it was deregulated in 1989, by the Labour government. Two years later it reversed that position and consolidated back into one company, after Labour had sold it to American owners for $4.25 billion. Maurice Williamson, who was National’s Minister of Communications at the time of the re-consolidation, said that the Government couldn’t do anything about it, even had it wanted to, because “he (Richard Prebble, Labour’s Minister for State-Owned Enterprises) sold that company without any rules…You would have faced huge legal obstacles: there would have been massive property right confiscation issues…It (the selling price) was way better than anyone expected. They got that price because they sold it without rules…$4.25 billion was a staggeringly successful sum of money, but we’ve paid the price ever since” (Press, 5/7/06; “Warning on need for rules to bind Telecom”, Adrian Bathgate). It’s remarkable what a bit of regulatory whip cracking can achieve. What a pity the Government has waited and wasted 16 years while Telecom’s monopoly has bled the country dry. Let’s hope it gets it right this time and doesn’t let Telecom off the hook yet again.


Of course, the long overdue unbundling saga is far from the only scandal involving Telecom, it’s always got several on the go at once. In May 2006, its Internet business, Xtra, crashed, affecting 600,000 customers and the shutdown lasted for several days. As Christchurch businessman Donald Evans said: “If I ran my business like that I’d be down the road” (Press, 20/5/06; “Thousands cannot connect to Xtra days after fault ’fixed’”, David King).

Nor was Telecom particularly forthcoming in offering redress. Thomas Tripp of Christchurch wrote to the Press (12/6/06; “Telecom arrogant”): “After suffering days of Internet outages, I was pleased to see Telecom/Xtra offering me and thousands of other customers a refund, but my pleasure turned to dismay when I received an e-mail from Xtra explaining what I had to do to get that refund. First, my refund was not automatic. I had to apply for it. To apply, I first had to sign on to a special Xtra Website. That took several tries. Next, I had to enter my customer number, telephone number, and e-mail address. The Website ominously informed me that if I made any data entry mistakes I might not receive any refund. This refund application is silly, since Telecom/Xtra obviously knows who I am, where I live, and my customer number. Indeed, this process strikes me as a subterfuge to discourage customers from applying for the refund they are due because of the recent Internet outages. New Zealand may rank 22 nd out of 26 th internationally for broadband value for money, but in my opinion New Zealand’s largest Internet provider sets the global standard for arrogance”. Even more unforgiveable from the viewpoint of the capitalist class is that Telecom’s regular cockups intrude on their profitable speculations. In June 2005 they closed the Stock Exchange on two consecutive Mondays. No wonder that it’s become the fashionable company to hate.

The biggest crash happened in June 2006, when a ripsnorting southerly storm cut power, and therefore both landline phones and mobiles, to 700,000 Aucklanders for the best part of a day (and sent CAFCA offline for a couple of days because our Christchurch-based ISP has its nerve centre in Auckland’s Sky Tower). More importantly, the same storm blanketed a great chunk of Canterbury under a huge snow dump, which cut power and all phone services to thousands of urban and rural people. We’re talking about what the phone TNCs dismissively refer to as POTS (plain old telephony services) and in the case of Telecom’s rural infrastructure, it has definitely gone to pot. It was a revelation to many that phone services, landline and mobile, can’t operate without electricity and both power and phone remained off for hundreds of rural Cantabrians for weeks after the storm, right in the middle of the most brutally cold winter for decades.

It was the total loss of communications with the outside world which really pissed people off. Once again, Telecom came in for a good oldfashioned kicking, from the highest level. When Helen Clark paid a belated visit to the snowed in region: “She was told at the debriefing that Telecom batteries that kept landlines working started to go flat on the on Tuesday, the day after the snow arrived. Generators also had to be taken to cellphone towers. ‘The impression I have had from all our briefings is that the (Ashburton District) Council acted very promptly, the Civil Defence and local civil defence were prompt and that lines companies have been throwing everything at it, but the telecommunications side, through Telecom, was not what it should have been and that’s something we will take up on behalf of the Council at a national level’” (Press, 24/6/06; “Clark vows to aid SI victims of snowstorm”. John Keast). Farmers and other rural residents complained that Telecom had learned nothing from the big 1992 blizzard, and that putting phone lines underground proved to be useless, as the batteries used as emergency backup in a power cut went flat in only 24 hours.

Once again, Telecom’s customer service left plenty to be desired. K.Simpson of Lake Coleridge wrote to the Press (27/6/06; “Tough luck”): “After the snow that cut telephone communications in our district for six days, I rang Telecom to ask about a credit. The reply was we cannot because you did not report a fault. I explained we do not have cellphone coverage where we live. Telecom said ‘tough luck’”. Telecom has proved, because of its years of extracting maximum profit at the expense of reinvesting in infrastucture, that it can’t be relied on. Farmers in isolated valleys were advised to club together and buy a satellite phone for future emergencies. What does that tell you about the reliability of our monopoly telecommunications company’s service?

… Ripoffs & Price Hikes: Business As Usual

There is never any depth to whichTelecom won’t sink in order to chase up a few cents (literally). In February 2005, the Christchurch District Court convicted Telecom for breaching the Fair Trading Act, fining it $4,000, plus $1,500 costs to the Commerce Commission and $130 court costs. The offence? It had charged a local fisherman, Gordon Henderson, an undisclosed 86 cents for using an Environment Canterbury phone service to find out how high the rivers were, and insisted that he pay. Instead, Henderson complained to the Commerce Commission. The case was heard in April 2004. When the ruling was released, his reaction was: “It took bloody long enough” (Press, 23/2/05; “Fishermen catch Telecom, hook, line and sinker”, Mike Houlahan). Telecom very generously refunded Henderson’s 86 cents, but he showed what he thought of them by switching phone companies.

In August 2005 Telecom Mobile faced refunding up to 22,000 customers after a Court of Appeal ruling that it had misled them in 2001 and 02. The customers had been led to believe that, if they broke the seal on a cellphone pack they received by mail, then they were obliged to pay for it and take the service offered. In fact, they could have cancelled the agreement, even if the phone had been used, without paying and having used it for a week. The Court ruled that Telecom had seriously misled customers as to their rights. Telecom appealed to the Supreme Court, accepting that the door-to-door and telemarketing campaign had breached both the Fair Trading and Door-to-Door Sales Acts, but denied that a refund provision in the latter applied. Further, Telecom submitted that although up to 22,000 customers had been affected, fewer than 1,000 remained on the relevant Telecom Mobile plan and any refund might be limited to them alone. The Solicitor-General, appearing for the Commerce Commission, said that if the refund provision did not apply, then Telecom “has got away with it completely” (Press, 10/2/06; “Telecom fights refund ruling”).

In October 2005, Telecom agreed to pay $54,000 compensation to 11,000 overcharged mobile customers in an out of court settlement with the Commerce Commssion under the Fair Trading Act. The action was instigated by Mark Harris, a former Christchurch detective, who spotted that he was being charged at the peak rate despite deliberately waiting until the off-peak time to make his mobile calls. When he contacted Telecom, it offered him a refund but told him that it couldn’t afford to put the problem right. “I wasn’t very impressed with their response. Two dollars didn’t mean anything to me, but I realised they could make a lot of money out of it. I only made a short call but if I’d been on the phone for half an hour it would have been 20-something dollars” (Press, 6/10/05; “Ex-officer nails Telecom slip-up: 11,000 customers overcharged”, Eleanor Wilson). So Harris went to the Commerce Commission, which investigated and threatened a prosecution until Telecom agreed to settle. Deborah Battell, the Commission’s Director of Fair Trading, explained: “The difference between peak and off-peak rates is a key driver of customer behaviour. Many customers wait until just after 7 p.m. to make off-peak calls, so a time discrepancy of just a few minutes has a big impact” (ibid). And, in November 2005, the Commerce Commission was onto Telecom again, investigating it after it bought radio spectrum rights without waiting for Commission clearance. The investigation was under section 47 of the Commerce Act which relates to takeovers that may substantially lessen competition in the market.

All these fines and court costs mean that Telecom has to ratchet up its prices further to recoup its legal costs. In March 2006, it increased its standard monthly line rental charge to $42.20, which will bring in around an extra $17.5 million per year (coincidentally, exactly the same amount that it agreed to pay to TelstraClear, in January 2006, as a one-off payment to resolve their years-long dispute about a number of issues, such as interconnection rates. Easy go, easy come, if you’re Telecom). In Wellington and Christchurch Telecom charges $7 less per month for line rental because of competition from TelstraClear’s residential lines network, so the increase in those two cities is to $34.80. Looking further ahead, Telecom has announced that, between 2007 and 2012, it will shift all 1.7 million phones in NZ from the existing switched circuit infrastucture, which dates from the early 1980s, to an Internet protocol-based network. This means that all homes with a Telecom phone will have to get a new phone or adaptor over the next six years, but Telecom says that it does not yet know how much it will cost or who will pay (I think we can all guess the answer to the latter question).

Fighting To Avoid Regulation Of Mobile Charges

Broadband is not the only area where Telecom faces regulation. It rakes in huge profits from mobile phones (as do the other mobile phone companies) and is desperate to stave off regulation. In June 2005 the Telecommunications Commissioner, Douglas Webb, asked the Government for the power to regulate the wholesale charge to force down the price of calls from a landline to a mobile. The standard price is 71 cents per minute, but because of various bundles of services it offers, Telecom receives on average 41 cents per minute for those calls. The Commissioner wants the wholesale charge to drop to 15 cents, to bring NZ into line with the much cheaper mobile rates charged overseas. True to form, Telecom offered to self-regulate – it made a secret offer to the Government that it would drop its mobile wholesale rates 30% in four years if the Government does not regulate them (Vodafone also offered to self-regulate, saying that it would lose $250 million revenue in five years if mobile calls are regulated).

However, the Commerce Commission is heartily sick of Telecom (and Vodafone). In December 2005 it recommended that the Minister of Communications, David Cunliffe, regulate mobile rates. The Commission rejected the offer by the mobile companies to self-regulate. Ernie Newman, the CEO of the Telecommunications Users Association of NZ (TUANZ) said that this reflected the fact that the Telecommunications Commissioner had lost patience with Telecom and its “history of making voluntary offers and then implementing them in a minimalist and totally unworkable way…Given the history of the industry with voluntary offers, we’d hope the (Commerce) Commission would look with great scepticism at any future last-ditch attempt to make voluntary offers to avoid regulation” (Press, 23/12/05; “Huge cellphone savings on way”, Adrian Bathgate). In May 2006, the Commission said that it would look at why NZ has only two cellphone operators, as a prelude to a broader examination of the regulation issue. There are other companies, large and small, eager for the opportunity to establish their own mobile phone networks.

But even if the Minister accepts the Commerce Commission’s recommendation to regulate, cheaper mobile phone calls would not be a reality until 2008, because of the length of time required under the process of the Telecommunications Act. In May 2006, Telecom made a second offer to voluntarily self-regulate, and this time ensured that the details remained secret. At the time of writing, the Minister had not announced his decision. There is serious money at stake here – analysts have predicted that a further $2 billion could be wiped off Telecom’s sharemarket value if the Government goes ahead with the regulation proposal.

And so the game goes on, with Telecom (and its partners in crime) doing its damnedest to avoid regulation or any constraints on its ability to milk its mobile phone cash cow. At least, in the case of broadband, the game is up and Telecom will be regulated. But there’s many a slip twixt cup and lip, and the Government and its regulatory agencies will need to be hyper-vigilant to ensure that this most cunning of shithouse rats does not continue to get away with the profiteering and monopolistic abuses that have marked its entire history. The Government deserves our gratitude but it is only doing what should have been done many years ago, and it has never made any moves towards seriously addressing the original crime perpetrated by its predecessor Labour government (which included many of the leaders of this one), namely the sale overseas of our publicly owned telecommunications system.

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Foreign Control Watchdog, P O Box 2258, Christchurch, New Zealand/Aotearoa. August 2006.


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