Battle looms over the future of telecommunications

Consumers won the war for a better deal from telecommunications providers but a fresh battle is looming.

The industry's once massive profits have been pummelled to a smouldering rubble.

Vodafone reported a $28 million loss in September, its first for 14 years.

Spark boss Simon Moutter complained before Christmas that the combined annual profit of the country's five biggest phone companies, Spark, Vodafone, Chorus, 2degrees and CallPlus, had fallen to half that of New Zealand's smallest major bank, ASB Bank.

Even in city fringes some people are still struggling to get a decent broadband. But statistics suggest the gaps are shrinking and that consumers are getting better value-for-money.

"I think consumers are in much stronger position today," says Telecommunications Users Association (Tuanz) chief executive Craig Young.

The sting is that telecommunications firms argue the combination of lower profits and high levels of industry investment can't last forever.

They will get an opportunity to tilt back the playing field courtesy of a discussion paper that Communications Minister Amy Adams is due to release within a few weeks. It will pave the way for a complete rewrite of the rules that apply to the sector.

The changes won't kick-in until after 2020 and after years of arcane rows over "unbundling" and wholesale pricing, consumers could be forgiven for letting out a collective yawn.

But wounded telecommunications firms already have their spades out digging fresh trenches.

This time, the fight will be on at least four fronts, encompassing the price of ultrafast broadband, net neutrality and the continuation of effective competition in the internet and mobile markets.

Young says Tuanz will be aiming "to make sure the gains we have made don't get lost" but adds it is in users' interest to have a strong telecommunications market with strong players in it. "We have to be mindful of that."

NET NEUTRALITY

One of the questions facing Communications Minister Amy Adams is whether and how to protect "net neutrality".

All bits and bytes are equal on the internet, but some are already more equal than others.

In the United States a fierce battle has been raging over whether internet providers should be allowed to profit by advantaging some online services over others.

Few argue all traffic on the internet should be treated absolutely equally. Soon all phone calls will be carried over the internet and it makes sense for 111 calls to be prioritised over computer games downloads.

As broadband is used to deliver health services and education, more situations may emerge where internet "traffic management" seems a good thing.

But fans of a "free and open internet" believe internet providers would cross a line if they charged content providers, such as social media companies and internet television providers, to give them an advantage over their competitors.

Net neutrality pitches content providers such as Google, Facebook and Netflix against network operators such as Vodafone and Spark.

Content providers won the battle in the US and that means any challenges to net neutrality in New Zealand are likely to be subtle, but they could still have a big impact.

Internet providers already "cache" or store some popular internet content locally on servers in New Zealand to save themselves money on transit, for example. But now they are asking why they shouldn't be allowed to charge content providers to do that.

Such charges could help the internet run faster by bringing data closer to consumers, but at the expense of disadvantaging new and smaller content providers that don't have deep pockets.

InternetNZ spokesman David Cormack says it would be disappointed if internet providers were thinking along those lines.

"Consumers pay for internet access and any attempts by internet providers to charge for caching would in our view be 'double-dipping'. That would be breaching net neutrality as we understand it and we would be surprised if that did happen."

Finding a formula on net neutrality that safeguards the diversity of the internet, while still allowing it to be used for more important things, will be one of Adams' toughest challenges.

ULTRAFAST BROADBAND

A decision needs to be made on how ultrafast broadband (UFB) should be priced after 2020.

That is when Chorus' and other UFB network-builders' pricing contracts with the Government come to an end.

Some telecommunications companies privately forecast the wholesale price of UFB could be slashed from about $40 a month to $25-$30, given the UFB network will be new and should require little ongoing investment.

Chorus wants to be allowed to earn a "regulated return on capital" through a regime known in Australia as the "building blocks" model. Chief executive Mark Ratcliffe told analysts in February "other companies have adopted the building blocks model and we think it makes sense here".

Under that regime, the wholesale price of UFB would be based on Chorus' estimated costs plus "a fair return" on investment and would be reset every several years. Chorus would be allowed to pocket the difference if it managed to achieve unexpected efficiencies.

The Commerce Commission also appears to favour this approach, which is designed to encourage monopolies to behave as if they are operating in a competitive market.

But economists have written screeds about how such regimes can give network companies "perverse incentives" to game the system and be lazy and inefficient.

Others argue it would be simpler to continue to set the price of UFB through contracts, rather than long-winded regulation, perhaps with some kind of advisory body overseeing negotiations to give them academic credibility.

A twist to the debate is that instead of driving the wholesale price of UFB down by $10-$15, the Government could keep prices the same. In return, it could insist Chorus and other network builders invest in further closing the "digital divide" and perhaps in a new subsea cable to replace the Southern Cross Cable which now carries almost internet traffic to and from New Zealand.

One source says that by contracting UFB at current rates, a massive surplus of hundreds of millions of dollars could be rapidly accumulated by network companies that could be directed by the Government to all sorts of industry "do-good" initiatives.

Tuanz appears to favour the regulated approach. "We have an independent regulator for a reason", Young says.

MOBILE

Vodafone has previously argued that it is time for regulators to cut the apron strings and let 2degrees, New Zealand's third mobile network operator, stand on its own two feet.

The economy has benefitted to the tune of $3.9b as a result of 2degrees bringing extra competition to the market, according to a study 2degrees commissioned from Venture Consulting in 2012. 2degrees has forecast that would rise to $13b by 2020.

But 2degrees' estranged co-founder and minor shareholder Tex Edwards argues there is long way to go to end Vodafone and Spark's duopoly in parts of the market.

Edwards refused an industry award last year for his part in creating 2degrees, in protest at what he viewed as a limp approach to market monitoring and regulation by the Commerce Commission.

Any expectation that Adams could consider competition in the market mobile "a job done" may have been removed in February when First NZ analyst Arie Dekker produced a comprehensive report on the sector.

He argued 2degrees would have to scale back its ambitions in the mobile market and perhaps throw in its lot with Spark and Vodafone, unless it was able to raise fresh capital.

That is even though 2degrees chief executive Stewart Sherriff insists its business plan is "fully funded".

Adams will need to weigh up whether, at a minimum, the Government may need to continue to give 2degrees the right to let its customers roam on Vodafone's mobile network in parts of the country where it doesn't have its own cellphone towers.

Depending what 2degrees' next annual result reveals about the company's cash flow, the flashpoint over mobile regulation could be much wider.

Edwards says the review is absolutely critical. "If the Government gets it wrong, in the next five to 10 years there won't be vigorous competition."

INTERNET COMPETITION

Spark, Vodafone, CallPlus and 2degrees control about 95 per cent of the fixed-line broadband market, following 2degrees' purchase of Christchurch internet provider Snap.

But the success of new players such as Trustpower in selling UFB shows it is still an open and competitive market.

The Government is due to consider whether Chorus should be forced to wholesale so-called "dark fibre" (its fibre-optic cables without any added electronics) on terms set by regulators after 2020. That would be called "layer one unbundling".

Obliging Chorus to sell its basic infrastructure without any add-ons sounds like a step forward for consumers. But the reverse may be true, as it would advantage larger internet providers that have deep pockets and economies of scale, while smaller internet providers could find it harder to compete.

Telecommunications Users Association chief executive Craig Young says it wants competition to be as "deep as possible" and layer one unbundling "sounds like the right thing to do".

But he questions whether it would be pragmatic.

The motto here may be "if it ain't broke don't fix it". This could be one less thing for Adams to think about.