It’s been a year since Watchdog last took a detailed look at Telecom (112, August 2006; “Telecom Drops Its Bundle”, by Murray Horton, which can be read online at http://www.converge.org.nz/watchdog/12/03.htm). A year that started off seeming to promise so much – namely that the Government had finally had a gutsfull of Telecom’s monopolistic prevarications and ordered it to “unbundle”, that is, open its local loop copper wire network to its competitors – but which has actually delivered so little because of Telecom’s familiar trick of dragging the chain in order to (very profitably) suit itself.

Indeed Telecom’s chain dragging over unbundling was the main reason that it was adjudged the (very close) runner up in the 2006 Roger Award for the Worst Transnational Corporation Operating in Aotearoa/New Zealand. The judges really agonised over their decision and came within a hair’s breadth of declaring a tie (the 2006 Roger Award was won by Progressive Enterprises; the full Judges’ Report can be read online at www.cafca.org.nz; follow the Roger Award Links from the Views, Analyses and Research page). Here is what the judges said about Telecom:

“Telecom’s charmed life as the monopoly with the longest record of resisting and undermining regulation seems to be coming to an end. But in a final fling in 2006, when one might have expected it to be a little more careful about its conduct, it continued to disappoint customers, argue every point with regulators, and so totally mismanage the roll out of ‘faster cheaper broadband’ while frustrating its competitors that it probably cost NZ a fortune in lost opportunities and certainly took years off our nominators’ and commentators’ lives.

“Much like Contact (another 06 Roger finalist. Ed.), the response could be ‘well, of course, a monopoly will game the system’. And indeed Telecom’s shareholders have profited handsomely from the endless gamesmanship with regulators and competitors alike. Or have they? There was certainly a point at which the corporate strategy could and should have changed in favour of an acceptance of fair competition. Who knows when that point was reached but it was certainly before 2006 and the ostrich factor has almost certainly cost Telecom, its owners and its customers heavily in preparation for running a successful business in a competitive environment. They could start by looking after the real people hanging off the end of their copper wires for one thing. Their shoddiness in dealing with the plight of Canterbury’s rural people during the biggest snow in 30 years, leaving many without communication for many days, was dreadful”. Telecom has maintained its unenviable record of being the only transnational corporation (TNC) to be a Roger finalist every single year since the annual Award was created in 1997 (although it has only actually won once).

In May 2006 the Government announced the compulsory unbundling of Telecom (it had to be announced before its scheduled inclusion in the Budget, because it had been leaked in advance to Telecom, the most serious Budget leak in 20 years). In June 06 the Government introduced the Telecommunications Amendment Bill to bring that unbundling into effect and also held out the possibility of splitting Telecom into separate retail and lines companies. David Cunliffe, the Minister of Communications, said that he wanted the Select Committee considering the Bill to seek submissions on the options of operational and physical separation. Other provisions in the Bill extended 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 provisions (the Bill required Telecom to prepare clear accounts about its retail and wholesale business activities as if they were independent entities) and $300,000 in any other cases.

Telecom 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 Bill, its Chief Executive Officer (CEO), Theresa Gattung, announced that Telecom would voluntarily go beyond the Government’s requirement of accounting separation and separate itself into a wholesale and retail division, although ownership and management would not change. Wholesale would look after Telecom’s national copper phone network, selling wholesale phone and Internet connections to Telecom retail as well as its competitors. Retail would sell phone and Internet connections to consumers and businesses, much as it does now. Gattung said that Telecom would take the unusual step of consulting competitors about this internal restructure and pledged that Telecom would 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 didn’t obviate the need for the new regulatory and enforcement provisions in the 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 might 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 appeared 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). Indeed the Government’s May 06 compulsory unbundling announcement had already wiped $3 billion off Telecom’s shares. Roger Kerr, the Executive Director of the Business Roundtable, had the cheek to suggest that the Government should consider compensating shareholders. Michael Cullen, the Minister of Finance, was quick to put that suggestion where it belonged.

Playing The Good Cop

Telecom’s intention to prevaricate was made clear from the outset. Its submission on the Bill to Parliament’s Finance and Expenditure Select Committee warned that any Government attempt to split it in two would lead to its TNC rivals taking advantage of low morale and poaching its key staff. It pushed for its own voluntary separation proposal, describing the Government’s one as “extreme” ( Press, 24/8/06, “Telecom attacks Govt move”, Tom Pullar-Strecker). Telecom asserted that it should only be forced to unbundle where it faced limited competition or on the say-so of the Commerce Commission. Furthermore, it wanted regular reviewing of its competitors’ access to its network and such access to be withdrawn if those competitors were investing in their own infrastructure. Theresa Gattung appeared before the Committee in September 2006 to reiterate the TNC’s preference for its voluntary separation proposal and to urge the Government to hurry up and set the rules so that Telecom could have certainty (what a wonderful irony, Telecom, the master of delay, urging the Government to hurry up). Gattung was playing the good cop, introducing Telecom’s submission by saying: “We are not here to oppose this Bill” ( Press 7/9/06, “Telecom bids for approval”, Adrian Bathgate). Gattung publicly stuck to this line throughout the time that the Bill was before the Select Committee. For example, she told the Telecommunications Users’ Association of NZ (TUANZ) that Telecom could have dragged its heels. “We could legitimately still be here in two years plus with that approach; instead we’ve taken a proactive approach” ( Press, 1/11/06; “Gattung defends Telecom’s stand”, Sue Allen).

A reality check was introduced into proceedings by Australian TNC TelstraClear, one of Telecom’s very biggest rivals, saying that it wanted any grey areas removed from the Bill as it believed that Telecom would exploit any loopholes. Its CEO, Allan Freeth, described Telecom’s voluntary separation proposal as “weak” ( Press, 14/9/06, “TelstraClear wants bill cleared up”, Adrian Bathgate). Freeth said: “We’re strong and enthusiastic supporters of this Bill. We really want to get on and get moving in this new environment” (ibid.). He revealed that Telstra, the parent company, had been so frustrated by the old Telecom monopoly that it had considered taking all of TelstraClear’s cashflow and investing it overseas. Nobody should feel any sympathy for Telstra, which is the telecommunications giant in Australia and Telecom the minnow, a minnow which has lost huge sums in ill considered ventures trying to get established in that country, money that should have been reinvested into Telecom’s rundown infrastructure in NZ (see below for details). It is, however, worth noting that Telecom has taken full advantage of the unbundling of Telstra’s local loop network in Australia, the very thing that it fought so hard to stop happening to its monopoly on this side of the Tasman.

For their part the politicians were eager not to get too tough with Telecom. Labour MP Shane Jones, Chair of the Finance and Expenditure Select Committee, said: “The Committee is very, very aware of the importance of maintaining pro-investment sentiment and pro-investment frameworks. For those people who have been angst-ridden and worked themselves into a lather about ownership splits, I think they should just wait and see” ( Press, 25/11/06, “Telecom may dodge regulatory carve-up”, Reuters). Telecom, however, is used to playing hardball with politicians. In October 2006 the Committee called Telecom back for a private hearing and Telecom’s Chairman, Wayne Boyd, presented an 11 page detailed proposal setting out its terms for a division into three operating businesses (the Committee made Boyd’s letter public, in November). Boyd didn’t muck around, Telecom’s five demands included: “that the threat of structural separation must be taken off the table. If, in its final draft, the Bill seeks to further hobble Telecom, for example, by not addressing the above points, then the company will have no option but to pause and consider its position” ( Press, 1/12/06, “Telecom tried to sway committee”, Sue Allen and Tom Pullar-Strecker). How’s that for a veiled threat? Telecom’s proposal was that only its aging copper phone lines would be carved off and housed within the network division, which would have to deal with Telecom’s retail division and its competitors. But Boyd’s letter proposed that Telecom’s other infrastructure assets, including its fibre optic cable and all its electronics, would sit within another business unit, which would not be subject to oversight by an independent board of directors. This self-serving suggestion was promptly criticised by industry lobby groups such as InternetNZ, which said that Telecom was trying to “minimise the impact of operational separation” ( Press, 4/12/06, “InternetNZ opposes Telecom proposal”, Tom Pullar-Strecker).

A Three Way Split

In the end, the Select Committee recommended that Telecom be split into retail, wholesale and networks divisions, in a bid to boost competition. Responsibility for managing the operational split was to be in the hands of the Minister for Telecommunications, with enforcement the responsibility of the Commerce Commission. But Paul Budde, a noted Australian telecommunications industry expert, said that the Commission should be solely responsible for the whole process, with no role for the Minister, otherwise there would be grey areas and delays, which Telecom would fully exploit (prophetic words).

Budde’s advice was not heeded and, in December 2006, the Telecommunications Amendment Act was passed into law, with the support of the National Party (ACT’s two MPs were the only votes against it, decrying the taking of Telecom’s property rights without compensation). The three way operational split – retail and wholesale and networks, which will have to operate at arm’s length from each other – is actually a noticeably tougher regime than the two way split – retail and lines – originally proposed by the Government when the Bill was first introduced. That toughening up resulted from the Select Committee’s six months’ long consideration of the Bill. But the divided responsibility remains, between the Minister and the Commerce Commission.

Of course, the passage of the Act was not the end of the story. The next stage required the drafting of requirements governing the split, a process open to public submissions. Michael Cullen, the Attorney-General, hoped that process would be wrapped up by July 2007. Surprise, surprise, Telecom has been fighting the three way split proposal, saying that it is too costly and impractical, estimating the capital costs at $150 million, with another $20m in trading costs each year. Industry analysts concluded that Telecom was playing up the cost and complexity of the proposed split, in order to get a better regulatory deal for itself and pointing out that British Telecom in Britain and Telstra in Australia had both managed a similar operational split quite quickly. By February 2007 the Commerce Commission announced that it would instruct Telecom to set out the terms on which it will fully unbundle the local loop, cutting short the protracted negotiations. Telecom and the Commission were now engaged in brinkmanship – in April, Telecom said that unbundling was 16 months away; the Commission gave it until July to provide details of how it will manage the process.

In April Telecom tried another tack and put up an alternative structural separation proposal, offering to sell its copper phone lines network to the Government or private investors, in return for being released from an obligation to wholesale its services to competitors. While this proposal, which amounts to a public admission of underinvestment in its core phone network by Telecom, excited interest from some in the industry and the media, it got the cold shoulder from the Government which was wary about the whole regulatory process being sidetracked whilst such a proposed sale was completed. It would involve the complete rewrite of a regulatory framework that was only six months old. From the other side of the spectrum, Simon Botherway, Executive Chairman of Brook Asset Management, a leading fund manager, urged Telecom to go much further and consider selling all its assets and to lobby the Government to dump the Telecommunications Service Obligations (former known as the Kiwi Share, dating from the original Telecom sale in 1990) and its shareholder ownership cap. He made it clear that the finance industry sees Telecom’s primary role as cash cow for shareholders.

A $1 Billion Investment Shortfall

Telecom adopted emotive language ( Press, 21/5/07; “Govt’s separation plan would ‘suffocate’ telco”, Tom Pullar-Strecker) and continued to play hardball, saying that the Government’s proposal would limit its ability to invest in infrastructure (in the past, it has always given paying out profits to shareholders a much higher priority than infrastructure investment). Specifically, it threatened that if the three way split goes ahead, it will invest only $500 million of the $1.5 billion needed to upgrade the nationwide copper phone network (replacing it with much more expensive fibre optic cable) to meet the Government’s target of delivering broadband to 90% of New Zealand homes by 2010. This would leave a $1billion shortfall to be picked up by someone else.

In June Telecom gave a plan to the Commerce Commission which would allow competitors to install their equipment in 40 of Telecom’s 600 phone exchanges by early 2009, and sought further delay in the Commission’s deadline for it to come up with the details of how it will manage unbundling. The Commission refused to extend that deadline and warned Telecom that, under the terms of the Telecommunications Act, it risked a fine of $300,000 for having missed it. This provoked CAFCA to join the fray:

“The time is long past for the Commission to muck around with Telecom, a past master of procrastination, bluff and brinkmanship. The Commission should purely and simply throw the book at this most recalcitrant of corporate recidivists. $300,000 sounds like a lot of money until you realise that Telecom is predicted to make a $875m-$895m profit in the current financial year, and picked up a cool $2.165 billion cash in March from the sale of Yellow Pages. In that context a $300,000 fine is parking meter money. If the Commission made it $300,000 for every day over the deadline, then Telecom might start taking a bit of notice (but not much, when placed alongside the billions in profits it has sucked out of the telecommunications cash cow in a very few years).

“When Telecom was ordered to unbundle the local loop more than a year ago, it promised to turn over a new leaf and fully cooperate. Yeah, right. It has resorted to its timehonoured practice of dragging the chain and prevaricating, blustering, threatening and trying to bully the Government into letting it do things to suit itself. This was the reason that Telecom was very nearly the winner of the 2006 Roger Award for the Worst Transnational Corporation Operating in Aotearoa/New Zealand (it came a very close runner up).

“As for its stated grounds in asking the Commission to extend the deadline, namely that it was worried about working its staff too hard – when has Telecom ever worried about its staff? Ask the many thousands that it has made redundant. That deserves a special award for hypocrisy. And what has been its priority in recent months – reinvesting those profits into NZ’s antiquated and overpriced phone network? Nope – chasing further profitable and speculative deals in Australia. Long suffering captive public of NZ to Commerce Commission – stop mucking around and throw the book at Telecom. Preferably a phone book (CAFCA press release, 12/6/07; “Commerce Commission Should Throw Book At Telecom”). Guess what – the Commerce Commission didn’t throw anything at Telecom.

And, needless to say, the July 2007 deadline for everything to be in place has come and gone. Come July the Minister for Telecommunications, David Cunliffe, said that the Government wants the law in place by the end of 2007and will proceed with its three way split proposal unless an acceptable alternative is agreed upon. It is secure in the knowledge that it has the backing of all other parties (except ACT), the media, most of the business sector and public opinion.

But the fact of the matter is that due to Telecom’s lack of infrastructure investment in the past, New Zealand languishes at 22 nd out of the 30 Organisation for Economic Cooperation and Development (OECD) member countries in terms of both broadband use and speeds. Those countries which have installed a fibre optic cable network, such as Japan and South Korea, have achieved the fastest broadband speeds for the lowest cost. But New Zealand is still stuck with Telecom’s old copper wire network, which hasn’t even been unbundled yet (something done many years ago in most other countries). Hence, thanks to Telecom, we remain a broadband backwater.

Ripping Off The Rival ISPs

Back in 2006, industry analysts said that a vital question is where will wholesale Internet access prices be set and predicted that Telecom would spend the next year trying to sign as many new Internet customers as possible, before the new law comes into effect. In September 2006 Telecom unveiled its revamped range of high speed Internet plans (you remember the corny ads on TV, featuring “The Xtraordinaries” geeks). For Internet Service Providers (ISPs) to whom it resells its broadband services (such as CAFCA’s ISP) it set the monthly regulated broadband full speed wholesale service price at $28.04, plus GST. The ISPs complained that this was not commercially viable because it left them unable to compete with the cheapest rate charged directly by Telecom’s Xtra ISP, which was $29.95 (if the customer also took tolls and a phone line from Telecom). The ISPs said that this more of the same old monopolistic behaviour from Telecom.

The ISPs won a small victory in October 2006 when the Commerce Commission cut Telecom’s wholesale price by 1%, to $27.76. The ISPs countered that the price should be closer to $20-22 per month. But the Commission was not going to be the bearer of glad tidings for Telecom’s rivals. In July 2007, after a further review (the promise of which had ended a 2006 court case brought by two rival ISPs), it cut the wholesale price by just another $1.41 per month, still leaving it well above what those rivals thought was a fair rate. As for those “Xtraordinaries” TV ads, they were the subject of several complaints to the Commerce Commission on the grounds that they misled viewers as to the actual speeds of Xtra’s broadband services.

Xtra was having enough difficulty delivering its existing services, let alone any new ones. In November 2006 there were 24 big outages on Telecom’s network, which wiped out broadband connections to its rivals such as CallPlus. In December Telecom customers asked for compensation for appallingly slow service. Xtra was barraged with spam (the curse of all e-mail users) which led to long delays. David Pascoe, a Christchurch bookshop proprietor, was one whose business was adversely affected: “They can be hours, days or even weeks behind, if they arrive at all” ( Press, 12/12/06; “Telecom legislation passes”; Sue Allen & David King). That some month Robert Fathers, the Chairman of the Dating Association (no, I didn’t know there was one either) complained that NZ online dating businesses were suffering losses because “Telecom stands out a mile as the clear winner of the worst Internet provider in the world”, with the slowest speeds ( Press, 20/12/06; “Dating slow off the mark – Telecom to blame”).

Outraged Multimillionaire & Refund To 60,000 Broadband Customers

2007 started with a public relations disaster of major proportions for Telecom’s broadband reputation. Jenny Gibbs is a nationally known art patron, philanthropist and the former wife of Alan Gibbs, one of the coterie of multimillionaire businessmen who did so very nicely out of Rogernomics and privatisation. Among other things he was involved with the privatisation of Telecom. She is worth $30 million and lives on Paratai Drive in Orakei, one of Auckland’s ritziest streets. Her Piha Beach holiday home has featured on a Telecom TV ad – the one in which a man paints his wife’s toenails as she video-conferences. But Gibbs, of all people, couldn’t get Telecom to connect her to broadband. She was still stuck on dial-up (she has my sympathies) and had been stuck with it for two years while Telecom told her that she was living in the wrong area for broadband connection. She chose not to pull any strings at Telecom, believing it to be inappropriate.

“But after watching Telecom promote super-fast broadband on the television in the past few weeks, she has decided to go public. Telecom has told her that the Remuera exchange – which her phone line is connected to – is full and has no more capacity for delivering broadband to her house… ‘As if that was meant to console me. When I see the amount of money they are spending on advertising without putting it into infrastructure I do think it is a bit outrageous’” (New Zealand Herald, 25/1/07; “Rivals step in after multimillionaire can’t get Telecom broadband”, Jenny Keown). You know that Telecom is in deep shit when it is being publicly criticised in those terms by a multimillionaire, particularly one called Gibbs. You can smell the outrage emanating from Nob Hill that their level of service from the telecommunications monopoly is no better than, or even worse than, what is offered to the “underclass” out in godforsaken south Auckland. You can read their minds thinking: “What was the point of corporatising, privatising and flogging off Telecom to the Yanks if we can’t even get bloody broadband from them in our Paritai Drive mansions?”. Naturally, Telecom’s rivals sensed a photo op and they were around to Gibbs’ place like a shot offering their services.

All this led to the Consumers’ Institute, in its inaugural Complete Ass Awards For Bad Products (we’re pleased to see the viral spread of the Roger Award idea), bestowing the Supreme Ass Award to Xtra’s broadband service. The Institute’s Executive Director, David Russell, said that it had been “inundated with complaints of slower speeds and frustrating cutouts”. To make things worse “you can’t switch on the telly or open the paper without being confronted by the leering geek band, the Xtraordinaries, proclaiming unlimited broadband speeds and no data caps” ( Press, 1/2/07; “Bad Products: Supreme Ass Award goes to Telecom”, Ian Steward). Telecom admitted the obvious in February 2007 when it pulled the plug on Go Large, one of its much touted new broadband services, because it was not delivering what it promised. 60,000 customers received a total refund of $8.5 million, covering the period from December 2006 to February 07. Telecom admitted that its rundown network might not have the capacity (bandwidth) to allow unlimited high speed Internet traffic and that Xtra had had to put a limit on all types of Go Large traffic 24 hours a day. Customers had complained of the slow speed of even bread and butter stuff, such as e-mail and accessing Websites, particularly at peak times, like evenings. Rather than add more bandwidth to its network, Telecom opted for the cheaper option, namely refunding its Go Large customers and closing it down, which preserves its profit margin per customer.

Telecom (and the other telecommunications TNCs) has a vested interest in not providing good quality broadband services, because they remove the need for the phone companies’ traditional cash cows, namely toll calls and fixed landlines, with line rentals payable to Telecom (which makes $1 billion a year from tolls and the likes of 0880 numbers, and another $1 billion from line rentals). Good quality broadband enables users to make free or low cost calls via the Internet (Voice Over Internet Protocol – VOIP) without needing a landline or line rental. Rival company, CallPlus, offers VOIP through its Slingshot subsidiary. Martin Wylie, CallPlus’ Chief Executive, said: “Presumably in the short run, anyway, their (Telecom) incentive is not to have VOIP providers like us providing services over the broadband network that completely undercuts and undermines their core telephony revenue” ( Press, 3-4/3/07; “Telecom’s tough call: progress will cost it”, Marta Steeman). Telecom promised a new superfast broadband service, later in 2007, but the catch is that customers will need to be less than four kilometres from a phone exchange to be able to access it.

Telecom’s sluggishness with broadband is impacting in all sorts of ways. Both Sky TV and the free-to-air consortium, Freeview, expect to start selling TV set-top boxes in 2008 that can connect to the Internet as well as receive programmes broadcast by satellite and terrestrial transmitters. This will constitute the much hyped “television revolution”. But Telecom has put a spoke in the wheel by saying that its broadband network won’t be able to support the download of TV programmes to set-top boxes until late 2009. Matt Crockett, Telecom Wholesale’s head, said: “Between deploying what is the world’s first broadband wholesale product of its kind, local loop unbundling and operational separation, it is impossible for the industry to do more” ( Press, 17/7/07; “TV revolution put on hold”). The TV companies expressed surprise that Telecom wouldn’t be ready for their deadline and that it hadn’t been more “aggressive” in gearing itself up for this.

Skewed Priorities: Australia & Huge Dividends To Shareholders

Telecom has never been far from the headlines in the past year. In August 2006, just months after the Government’s bombshell (but long overdue) unbundling announcement, Telecom announced a $435 million loss for the 2005/06 financial year. It was caused by Telecom writing off $1.3 billion from the value of AAPT, its Australian subsidiary (following an earlier $1 billion write off four years earlier). That meant that Telecom has now effectively written off all of the $2.2 billion it paid for AAPT when it made this disastrous offshore purchase, in 1999 – AAPT is now valued at just $270 million. But being a firm believer in the old adage of throwing good money after bad, it committed to invest another $140 million in AAPT in the 2006/07 year. Indeed, it is determined to become a player in the Australian telecommunications market. In February 2007, it bought PowerTel, an Australian network provider, for $A320 million. This made AAPT the third biggest telecommunications company in Australia, but that still amounts to only a 4% market share. There was also talk of it having to spend up to $A300 million by way of recapitalisation if it wants to maintain its 19.9% stake in an Australian joint venture with Hutchison Telecommunications. Australia was the most likely destination for a large chunk of the $2.165 billion cash it got for the sale of Yellow Pages in March 2007 - and, typically, $1.1 billion of that was earmarked to be paid out as a windfall dividend to Telecom’s shareholders, rather than being reinvested (for details of the Yellow Pages sale, see Bill Rosenberg’s article at the end of this one).

In July 2007 a report by the Organisation for Economic Cooperation and Development (OECD), using 2005 figures, revealed that New Zealanders spent a greater proportion (5.4%) of Gross Domestic Product on telecommunications than any of the 29 other OECD countries (the OECD average is 3%) but that the NZ telecommunications industry only reinvested 8.7% of its revenue (the OECD average is 15.3% - only Greece and Austria spent less). Those damning figures speak for themselves.

So, instead of reinvesting money into its chronically underdeveloped NZ infrastructure, Telecom continues to waste it on quixotic and loss making Australian ventures (and pay it out as huge dividends to its shareholders). Paul Budde, the Australian telecommunications expert, was among those who queried why Telecom persists with its Australian quagmire: “What will they do then with the Hutchison investment? That’s another waste of money. It’s all a big mess” ( Press, 31/3 & 1/4/07; “Telecom turnaround”, Kate Perry). Although Telecom has fared better in the Pacific – in September 2006 it made a $20 million profit from selling its 90% stake in Telecom Samoa Cellular; it also has a 60% stake in Telecom Cook Islands).

Redundancies & Exporting Jobs To Manila

Its other, very characteristic, reaction to this 2005/06 unusual loss (just a small blip in an otherwise uninterrupted procession of exorbitant annual profits; the 2006/07 one is projected to be in the range of $875m-$895m) was to start firing hundreds of people. By January 2007 it had made 230 redundant, and reports suggested that 700 was the end total (out of a New Zealand staff of 7,000+).

Simultaneous to mass redundancies is outsourcing of some Telecom services. In 2006 Telecom outsourced two of its help desks – pre-paid mobile phone and dial-up Internet inquiries – to call centres in Manila. It then promised that it had no plans to outsource anything else but, lo and behold, Telecom admitted, in July 2007, that it was conducting a three month “trial” training staff in the Philippines to answer NZ inquiries about Xtra’s broadband services. This could affect up to 250 Telecom call centre staff in NZ, who would not have been reassured by their employer saying: “Cost is a huge factor and is one of the reasons Telecom is looking at this option, rather than increasing New Zealand-based call centres” ( Press, 10/7/07; “Telecom running ‘trial’ in Manila”, Greer McDonald).

I must say that I can see both sides of this argument. As a New Zealander, and a former union official, obviously I don’t want New Zealand workers’ jobs to be exported overseas. But I also have a Filipino family in Manila, with one brother-in-law who works in a call centre (I don’t know if it’s the one with the Telecom contracts). Believe it or not, call centre jobs are keenly sought after by Filipino workers, because they’re seen as higher paid (although obviously much less than their NZ counterparts) and more prestigious, because of the English language proficiency required. The Philippines’ biggest single export is labour, with up to ten million people working outside the country permanently or temporarily (if I ring our bank’s NZ call centre, one of those I deal with is a Filipino. In 2006 they constituted the second biggest group of migrants to NZ, after British). These are people who desperately need jobs in their own country. Some of the media comment about this Telecom outsourcing “trial” was nothing more than thinly disguised racism directed at Filipinos and the Philippines. The obvious answer is that both NZ and Filipino workers need jobs but not at each other’s expense.

Abuse Of Monopoly

Denial of interconnectivity (the ability of phone companies to access each other’s networks and what rate to charge each other) has been a weapon that Telecom has wielded against all its rivals for many years (“Telecom Drops Its Bundle”, by Murray Horton, in Watchdog 112, August 2006, which can be read online at http://www.converge.org.nz/watchdog/12/03.htm, details the issue as it related to Telecom and TelstraClear – they stitched up a cosy duopoly deal in 2006). Vodafone went to the Commerce Commission in January 2006, complaining that Telecom would not let it exchange local calls for free, as Telecom does with TelstraClear. In September 06 the Commission ordered Telecom to interconnect with Vodafone for no cost and gave it a minimum of four months to get this up and running. This removed the last barrier to the latter’s customers being freed from the need for a Telecom landline (they would be able to use a Vodafone mobile as both a home phone and a mobile).

Telecom’s longrunning abuse of its monopoly means that mobile services available overseas for years are only now becoming available in NZ. For example, number portability (which means that customers can change their mobile phone company but keep the same number) was a major battleground for years between Telecom and its rivals, principally Vodafone. It finally came to NZ in April 2007 and is still not fully operational.

Other examples abound of Telecom’s abuse of its monopoly. Back in the early Noughties CallPlus and the Commerce Commission jointly took Telecom to court over the latter’s charge to use its 0867 prefix for dial-up Internet access by rivals. In 2004 the High Court ordered Telecom to sift through its back up tapes back to 1999 to provide the evidence of monopoly abuse. The cost was estimated to be up to $300,000, which the Court ordered to be split between Telecom and the Commission. The latter duly appealed; CallPlus settled with Telecom in 2005 but the Commission pressed on; and, in September 2006, the Court of Appeal upheld the ruling, although ordering that Telecom only had to retrieve one year’s worth of its old records, but that it has to bear the entire cost of the search.

Government Backs Down: Self-Regulation For Mobile Rates

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 wanted 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 Chief Executive Officer 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 accepted 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. There is serious money at stake here – analysts predicted that a further $2 billion could be wiped off Telecom’s sharemarket value if the Government went ahead with the regulation proposal. In October 06 the Commerce Commission announced that it would launch a formal investigation into the mobile phone market, after its preliminary work found “a lack of effective competition” in the market dominated by Telecom and Vodafone ( Press, 11/10/06; “Mobile threat to Telecom’s value”, Adrian Bathgate).

An April 2007 report by the Commerce Commission concluded that New Zealand is among the five most expensive of the 30 countries of the Organisation for Economic Cooperation and Development (OECD) for the prices of both landlines and mobile phones. Once again, the Commission recommended regulation for the wholesale mobile termination rate (what the companies charge other carriers to terminate calls on their networks) but Telecom and Vodafone escaped that fate by offering to cut their mobile termination rates over the next five years. Trevor Mallard, the Minister for Economic Development, rejected the Commission’s regulation recommendation in favour of the companies’ self-regulation offer. This backdown by the Government infuriated both the Consumers’ Institute and the Telecommunications Users Association of NZ (TUANZ). Ernie Newman, TUANZ’s Chief Executive, said: “The Minister’s deal is an extremely poor one for users…The high prices being charged in New Zealand are the result of substantial supplier power in a duopoly market” ( Press, 2/5/07; “Mobile phone charges: Deal angers consumers”, Dan Eaton). Newman pointed out that mobile phone rates in NZ (as high as 71 cents a minute to call a mobile from a landline) are twice as high as newly set Australian rates. The first signs of genuine competition in mobile phone rates came in July 2007 when Vodafone dropped its home-to-mobile rate to 39 cents per minute (compared to Telecom’s 71 cents), as part of its package which includes a full range of landline and broadband services to business customers.

Mobile phone services are where the big profits are to be made and Telecom is quite happy to invest in that sector. In June 2007 it announced that it will spend $300 million building a new mobile phone network, based on the same wideband code division multiple access technology (WCDMA) used by Vodafone. Why? Because most of the world uses that in preference to Telecom’s existing code division multiple access (CDMA) technology, and Telecom’s hand has been forced by Telstra which plans to switch off Australia’s last CDMA network in 2008, leaving Telecom customers who visit Australia no network to “roam” on (meaning that they can’t use their Telecom mobiles outside of NZ). Industry analysts estimate that the roaming market, for both inbound and outbound calls, at about $200m annually and that Vodafone has up to 85% of it (Vodafone has more than 60% of NZ’s mobile market, by revenue).

Double Charging Record Refund

The Commerce Commission will never be out of a job as long as Telecom is around. In October 06 it announced a deal whereby Telecom agreed to pay $3.3 million in compensation after double charging some customers dating back to 1989. This involved up to half a million customers who switched from one type of landline or mobile phone plan to another – some customers were billed for one day at both the old and new rates. Telecom’s refund, all but completed by March 07, was the biggest out of court settlement for double charging in NZ’s corporate history. A complaint had been laid with the Commission in 2005 (Becky and I were among those to receive a written apology from Telecom and a tiny refund – the average was $1.25, credited to the customer’s account). This came at the same time in 2006 as TVNZ’s Fair Go programme was highlighting the fact that Telecom was charging some customers for phone rental when they were no longer renting a phone (i.e. they had bought one). The exposure of this double whammy ripoff led Telecom to announce that it was reviewing all its auditing and billing systems.

Customer service and public relations have never been Telecom’s strong suits. Right on Christmas 06 it announced that about 50,000 of its customers still using the old 025 mobile prefix could be cut off when that network shut down at the end of March 2007. And this was closely followed by the truly Scroogelike announcement that Telecom had dumped its concession rates for not-for-profit groups in favour of slightly reduced business rates. So, those groups lost their half price line rental and free local calls, being transferred to business rates with a 5% discount across all their telecommunications bills (toll calls, mobile phones, broadband). This adds hundreds of dollars a year to the running costs of charities dependent on volunteers. For good measure, its TV ads pissed off librarians. The offending one featured three teenage girls talking about how they do their homework quicker by using broadband and how no one goes to libraries any more. The Library and Information Association complained that this denigrated libraries and books; in January 2007, Telecom agreed to pull the ad. That same month it had to launch an investigation into its 111 emergency call service after a woman calling from Tuatapere, in Southland, was twice unable to get through to it after a visitor collapsed in her home. More seriously, the 111 system failed again in July 2007 when an Auckland man who was the victim of a violent home invasion and robbery unsuccessfully rang 111 15 minutes in 20 minutes, finally having to call a private security firm for help.

Profiteering From Line Rentals

Telecom makes damned sure that if its landline monopoly is under threat of obsolescence by the likes of VOIP then it is going to screw every last cent of profit out of it while it can. In January 2007 it announced that monthly line rentals would be increased (from March) by up to $1.85. Once again commentators pointed out that line rentals are $7.60 cheaper in Wellington and Christchurch because these are the only two cities where it actually faces land line competition (from TelstraClear. When that rival was rolling out its [since stopped] network, Telecom was actually offering cheaper rates on a street by street basis in an attempt to undercut the unaccustomed competition). Paul Budde, the Australian telecommunications expert, said: “Prices in technology are dropping and dropping and dropping, and so it’s very difficult to argue that these prices (line rentals) should go up. Nowadays the technology is available so that you can make telephone calls for next to nothing. Telecom is very aware of that” ( Press, 16/1/07; “Raising phone charges ‘flawed’”, Janine Bennetts).

The Press editorialised: “In short, it (the line rentals increase) is but another example of the casual attitude Telecom has long displayed towards its largely captive domestic telephone market and which none but the most starry eyed optimist will expect respite from any time soon…For its part, Telecom has only been getting away with what it can. The latest line rental increase is just another example of this, and the company hardly bothers to pretend to be apologetic any more. It has offered the flimsiest of excuses to justify the increase (which it imposes most years), that it is only passing on the cost of doing business. Most companies could only marvel at the thought of being able to do the same, rather than having to continually absorb the inflationary and other pressures which are a cold reality of less privileged, more competitive environments” (17/1/07, “Monopoly busting”).

At the same time the Minister of Telecommunications, David Cunliffe, announced a review of the terms of reference the Telecommunications Service Obligation (TSO, which used to be called the Kiwi Share, dating from when the Labour government sold Telecom in 1990). Cunliffe said that he wants to retain free local calling, so we must be grateful for small mercies, but Telecom made no further mention of its April 2006 offer (made as part of its unsuccessful attempts to stave off local loop unbundling) to include a basic broadband Internet connection in the TSO. The TSO involves Telecom’s rivals paying it a sum, fixed by the Commerce Commission, to compensate it for its loss making customers. The Commission is always several years behind the play – so, in July 2007, it announced that the TSO cost to Telecom, for the June 2004/05 financial year, was $71.4 million and $78.3m for the 2005/06 one, of which Telecom had to pay 69% and the balance was divided proportionately between its rivals, mainly Vodafone and TelstraClear.

Gattung Gone. New Singer, Same Old Song

July 2007 marked the end of Theresa Gattung’s eight year term as Telecom’s Chief Executive Officer. This was the most high profile direct result of her total miscalculation that the Government would not order the unbundling of the local loop. Only days after that May 2006 unbundling announcement, with Telecom’s share price in freefall, a March 2006 audio clip was made public of an astonishingly arrogant and honest 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 Helen Clark down. Perhaps this is what the Shareholders’ Association’s Bruce Sheppard had in mind when he later told the Listener: “She has this habit of having two feet and finding a way to jam them both into her gob at the same time” (Profile, “The Mother of all Theresas”, 7/7/07, Rebecca MacFie).

Rod Deane, Telecom’s Chairman (and her predecessor as CEO) had the decency to resign shortly after that 2006 bombshell hit Telecom. But, despite pressure from the business community and the media for her to go with him, the Board gave her a final 12 months to manage the transition to a new CEO and pile up several more million dollars as the country’s highest paid boss in the process (for the background to this see the section headed “Dean Dumped; Will Gattung Be Told ‘You Go Girl’?” in “Telecom Drops Its Bundle”, by Murray Horton, in Watchdog 112, August 2006, which can be read online at http://www.converge.org.nz/watchdog/12/03.htm). So her year long farewell was the subject of much media coverage – for example the Listener devoted two articles to her. One, by its Business columnist, David Young, was subtitled “Telecom’s Theresa Gattung had lots to say. Pity it wasn’t more interesting” (9/3/07). Rebecca MacFie’s lengthy Profile of her (“The Mother of all Theresas”, 7/7/07) included analysis from TUANZ’s Ernie Newman who said that Gattung must bear responsibility for the Government ordering Telecom to unbundle: “Effectively, Theresa put her name to a promise to the Government (in 2004) that ‘if you leave us alone, we will deliver you the results that you want’. And they failed dismally”. Gattung disputed that, saying: “I think if you spoke to any commentator they would say that it was rather unusual to have every measure known internationally in telco regulation landed on your plate in one go. That’s pretty unusual and I’m proud of how we’ve dealt with that”.

In June 2007 Paul Reynolds, the Chief Executive Office of BT (British Telecom) Wholesale was named as Gattung’s successor, taking over in September. His annual salary package is $3.5 million - $600,000 a year more than Gattung’s. Possibly Telecom’s Board hopes to pick Reynolds’ brain about what it’s like to for a telecommunications company to undergo an operational separation, because BT has already been there and done that, whereas Telecom is still being dragged, kicking and screaming, through the process. But despite the singer having changed, the Telecom song remains the same – ripoffs, abuse of monopoly, profiteering, price gouging, redundancies, outsourcing, obstruction, threats, bullying, incompetent service you name it. I can feel another Roger Award nomination coming on.