Smashing Some Myths about Telecom
Interesting to hear some myths about Telecom in the past few days:
Myth 1: Telecom is a Monolopy.
There is nothing (apart from our draconian planning laws) prevent anyone building their own network, except profitability. In Wellington and Christchurch TelstraClear did build it's own network and undercut Telecom's pricing. At my house I could disconnect Telecom completely and still have another telephone provider and a choice of two ISPs. Telecom only has a monolopy because of the failure of anyone else to invest in building a network.
Myth 2: Telecom enjoyed huge profits because it has no competition, so exploited it's monolopy position.
When Telecom was sold in 1990 by the NZ Government for $4.25 Billion, a regulatory framework guarunteed that Telecom could only raise phone line prices at the rate of inflation and would have to leave free calling in place. So, your Telecom phone costs cannot cost any more in real terms than when the Government last provided the telephone service. In Wellington and Christchurch, Telecom cut the price of phone lines to match TelstraClear's offerings, so overall phone lines are slightly cheaper in real terms.
Also, in 1990 the sending data over telephone lines was restricted only to large companies. At this point, Bill Gates didn't think the internet would ever grow into a widely spread network - most of the rest of us didn't even know about it's existance.
In 1990 cellphones were commonly called 'Yuppie phones' as only high paid executives and lawyers had them. The idea that in 15 years time that everyone would have one (or in a lot of cases two) was not widely accepted.
Telecom's profits have grown as the number of different services it offered grew and expanded. If it was still a phone line company it's profits would be nowhere near the amounts it reaches today.
Myth 3: Telecom prevented anyone else from using it's exchanges
If Telecom prevent any rival from using it's exchanges then Vodafone, TelstraClear and any number of other telecommunication and ISP companies wouldn't exist. Telecom allowed access by negotiation with agreed compensation.
Myth 4: Telecom exaggerated the potential losses if the Local Loop was unbundled.
Have a look at the share price and tell me that one again - most analysts picked a 5% fall in the share price when LLU was announced, it's now down almost 15%. Overseas investors who sold out probably won't reinvest in New Zealand again - that's a loss to all New Zealanders.
Myth 5: Telecom had it coming.
This is just plain Government spin. Karl Marx was born 188 years ago this week, he would be proud of how the Government abolished the private property rights that Telecom enjoyed. All those who think this is a great move should consider if the Government can regulate what Telecom does with their property without any compensation, then they can regulate what you do with your property without compensation.
There are real benefits from the Local Loop Unbundling, and it is in the public interest. All the new, fantastic offerings we are hearing about ($10 per month broadband) can now be realised. I'm sure Telecom would have allowed LLU to happen if the Government had the price been right.
But the Governments unilateral decision to take away Telecom's rights to use it's own property how it sees fit has destroyed $2 billion dollars of wealth in New Zealand. When the Government took control of the Rail Network it paid for the leases and land rights it had to take control of (about $50 million) and pledge to spend $200 million on upgrading the tracks. It also gave Toll an effective tax benefit (estimated to be worth up to $70 million) as it had to write off the tracks off it's books at a loss. All up, the cost of opening rail up to competition was about $300 million.
So I don't see why the Government doesn't see paying compensation to Telecom as necessary - as it has essentially done the same as it did with the Rail Track. The only difference is that instead of taking outright ownership it will regulate the local telephone network and determine the price Telecom can charge for services - which is everything that the owner of an asset normally does.
Myth 1: Telecom is a Monolopy.
There is nothing (apart from our draconian planning laws) prevent anyone building their own network, except profitability. In Wellington and Christchurch TelstraClear did build it's own network and undercut Telecom's pricing. At my house I could disconnect Telecom completely and still have another telephone provider and a choice of two ISPs. Telecom only has a monolopy because of the failure of anyone else to invest in building a network.
Myth 2: Telecom enjoyed huge profits because it has no competition, so exploited it's monolopy position.
When Telecom was sold in 1990 by the NZ Government for $4.25 Billion, a regulatory framework guarunteed that Telecom could only raise phone line prices at the rate of inflation and would have to leave free calling in place. So, your Telecom phone costs cannot cost any more in real terms than when the Government last provided the telephone service. In Wellington and Christchurch, Telecom cut the price of phone lines to match TelstraClear's offerings, so overall phone lines are slightly cheaper in real terms.
Also, in 1990 the sending data over telephone lines was restricted only to large companies. At this point, Bill Gates didn't think the internet would ever grow into a widely spread network - most of the rest of us didn't even know about it's existance.
In 1990 cellphones were commonly called 'Yuppie phones' as only high paid executives and lawyers had them. The idea that in 15 years time that everyone would have one (or in a lot of cases two) was not widely accepted.
Telecom's profits have grown as the number of different services it offered grew and expanded. If it was still a phone line company it's profits would be nowhere near the amounts it reaches today.
Myth 3: Telecom prevented anyone else from using it's exchanges
If Telecom prevent any rival from using it's exchanges then Vodafone, TelstraClear and any number of other telecommunication and ISP companies wouldn't exist. Telecom allowed access by negotiation with agreed compensation.
Myth 4: Telecom exaggerated the potential losses if the Local Loop was unbundled.
Have a look at the share price and tell me that one again - most analysts picked a 5% fall in the share price when LLU was announced, it's now down almost 15%. Overseas investors who sold out probably won't reinvest in New Zealand again - that's a loss to all New Zealanders.
Myth 5: Telecom had it coming.
This is just plain Government spin. Karl Marx was born 188 years ago this week, he would be proud of how the Government abolished the private property rights that Telecom enjoyed. All those who think this is a great move should consider if the Government can regulate what Telecom does with their property without any compensation, then they can regulate what you do with your property without compensation.
There are real benefits from the Local Loop Unbundling, and it is in the public interest. All the new, fantastic offerings we are hearing about ($10 per month broadband) can now be realised. I'm sure Telecom would have allowed LLU to happen if the Government had the price been right.
But the Governments unilateral decision to take away Telecom's rights to use it's own property how it sees fit has destroyed $2 billion dollars of wealth in New Zealand. When the Government took control of the Rail Network it paid for the leases and land rights it had to take control of (about $50 million) and pledge to spend $200 million on upgrading the tracks. It also gave Toll an effective tax benefit (estimated to be worth up to $70 million) as it had to write off the tracks off it's books at a loss. All up, the cost of opening rail up to competition was about $300 million.
So I don't see why the Government doesn't see paying compensation to Telecom as necessary - as it has essentially done the same as it did with the Rail Track. The only difference is that instead of taking outright ownership it will regulate the local telephone network and determine the price Telecom can charge for services - which is everything that the owner of an asset normally does.
posted by Michael at
4:20 PM
6 Comments:
Myth 1 - there is nothing stopping anyoen building their own private state motorway system also. And there is nothing stopping someone building their own national electricity grid. So by your logic there are no monopolies anywhere ever.
Myth 2 - the KSO is what has stopped line charges going up. This is an industry where prices in all products have decreased over time. Telecom have not lost money due to KSO price limits. Telecom has made huge money through the growth fo Internet and data as all their competitors have to work through them.
Myth 3 - when it takes eight years to agree on a numbering plan, negotiation has its flaws. Telecom offering wholesale services at a level which is higher than its own retail services is not competitive.
Myth 4 - only an idiot would judge a share price off two days trading. The proper judgement will come in a year or two.
Myth 5 - Telecom are largely responsible for what has happened indeed. They gamed the current regulatory framework to the point it was failing to achieve the purpose for which it was created. The law changes are not a change to the principle of competition law just to the details. Telecom will be paid fees for local loop access. They had refused at any price to allow local loop access by negotiation. They will make a profit off the local loop access.
By
David Farrar, at 7:02 PM
Michael, I can't believe that you come to the defense of a foreign owned company (Telecom New Zealand) which has for years used its dominant position to make exorbitant profits which are always promptly sent overseas rather than invested in NZ. Some of their NZ cash goes to their Australian offshoot which still can't make money (and won't ever because it is based on the telecom monopoly model) while the rest goes to overseas shareholders who regard the company as a cash cow. Why hasn't Telecom invested in quality broadband in NZ rather than trying to be a player in Australia?
I know that Telstra/Clear, Vodafone etc aren't locally owned companies either but then none of them pay their chief executive so much for such a poor sequence of results.
I for one will look forward to sensible line charges and a decent broadband service so I can get on and make a dec ent profit without having to carry a load of extortient telecom charges on my sholders.
By
steven, at 7:18 PM
David/Steven: I'm not going discuss this further - suffice to say that we will for ever disagree on whether or not the LLU has been handled correctly.
I'm not against LLU (and never have been) but if it's good enough to commit $300 million for Toll Rail (100% Australian-owned) and $1 Billion for Air NZ (which was 66% Singaporian-owned) then why is Telecom treated so badly.
By
Michael, at 7:37 PM
Michael, I'd say that in those cases the circumstances are different. In Toll's case it was designed as a sweetener to encourage them to invest. In the case of Air NZ it was simply to stop them imploding and leaving us at the mercy of Qantas.
By
Rich, at 9:40 PM
The Governments action in proping up Air New Zealand and de-looping telecom are entirely consistant. they are both aimed at preventing monopoly situations. The toll bail-out by purchasing the tracks is the same again by making sure rail exists to prevent a road monopoly.
Telecom isn't being treated badly. it's being prevented from treating all NZ consumers badly.
I think that you should admit on this one that you have got it wrong Michael and stop standing up for a bully!
By
steven, at 7:08 PM
"When we hang the capitalists they will sell us the rope we use." - Josephn Stalin.
By
Michael, at 7:16 PM
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