Bit caps, and why they need to go

Taylor Reynolds says that until Kiwis are free to use their internet connections without cap limits, problems will continue.

"My life after bit caps is so much better."

It was a seemingly innocuous statement from Taylor Reynolds, telecommunications statistician for the OECD, delivered about halfway through his presentation at a Tuanz conference last week.

But it drew a chorus of laughs from attendees, and could very well have been the title of his speech.

Reynolds was the keynote speaker in Wellington at the Telecommunications Users Association talkfest, brought in by the lobby group to present an international perspective on New Zealand's telco industry.

Traditionally, such international perspectives have tended to be gloomy, but this year was different. In light of the Government's intention to dismantle Telecom's phone and internet monopoly, Reynolds was upbeat in general about this country's prospects.

He called the Government action - which involves giving Telecom's competitors access to its network, forcing the company to offer unconstrained internet speeds and separate the service from phone offerings, and implementing accounting separation - a great opportunity for New Zealand.

But Reynolds, who lives in Paris, pulled no punches on one of the biggest problems facing internet use: download limits, or bit caps as they're known.

New Zealand is one of only eight countries in the 30-member OECD where internet service providers still force bit caps on customers. The limits inhibit internet use and development, Reynolds told the conference.

"Bit caps really do change the way you use the internet. Until New Zealanders are free to use their internet connection, you're going to have problems," said Reynolds, who enjoys unlimited downloading on the broadband connection he has with his provider, the French company appropriately named Free.

Usage restriction is the main cause for New Zealand's underdeveloped online business industry, he said.

Despite ranking well ahead of most of the OECD in internet use in general, New Zealand has about 15 websites per 1000 people - less than half the average of 31 and well behind Germany, which leads with about 85.

Reynolds said the only way to spur faster development is to remove the bit caps. "That will create a content industry here."

Reynolds' view is supported by a study of international broadband services by Internet NZ, released yesterday. The internet governance group's study found that New Zealand is dead last in the OECD in percentage of broadband plans offered with bit caps - nearly 100 per cent.

"Most alarming from the report is the clearly out-of-step position of New Zealand in respect of data caps. Data caps are just not common practice across the OECD," said Internet NZ executive director Keith Davidson. "They create a real and serious constraint on the uses to which broadband internet connections can be put."

Bit caps' biggest inhibiting factor, thus far, is on emerging video content. Since video files are generally large, customers are mindful of downloading them for fear of chewing through their bit caps.

Industry observers have even suggested that bit caps are the biggest reason New Zealand is one of the few developed countries where Apple Computer has yet to open its iTunes online download store.

The world's largest music and video download site just doesn't have a business case to open here, they say. Not only is the market small to begin with, but customers would be limited in how much product they could buy from Apple - a double disincentive for the company to set up shop.

The Internet NZ study also found that bit caps here tend to be lower than in most countries. Telecom's caps range from 200 megabytes on its basic broadband plan up to 10 gigabytes, and once they are exceeded customers either incur extra charges or have their broadband connection throttled back to dial-up speed.

Other ISPs impose similar restrictions.

The reason for data caps is threefold, ISPs say.

The first and biggest is international bandwidth - the price of flowing traffic across the ocean, mostly to and from the United States where most internet content is located.

ISPs say prices on the Southern Cross cable, which is the main pipe in and out of NZ and which is half-owned by Telecom, are high and likely to remain so for the foreseeable future.

But Reynolds said international connectivity shouldn't be a problem since most such pipes were vastly underused.

"For the most part, there is a glut of capacity on international routes. It shouldn't be an issue," he said.

Bit caps could vanish if the owners of such pipes simply dropped their prices.

Ultimately, it's a chicken-and-egg issue - bit caps discourage internet use, which keeps the cost of international bandwidth high. Greater internet use would mean more volume, which would lower costs.

The second reason for bit caps is local bandwidth - the price of flowing traffic around New Zealand.

This cost is relatively low to international bandwidth, but is also not helped by the absence of peering agreements.

While the country's two biggest ISPs, Telecom's Xtra and TelstraClear, share each other's traffic for free, smaller providers must pay the two companies for it.

Only about 10 per cent of New Zealand's internet traffic is generated by websites in the country; the vast majority comes from overseas.

It's again a chicken-and-egg scenario - if more online content was generated locally there would be more local traffic and thus lower bandwidth costs.

The last factor in bit caps is backhaul, which is the total amount of traffic Telecom allocates to each of its wholesale ISP customers.

When an ISP exceeds its total amount of allocated traffic, it incurs extra charges from Telecom.

ISPs are thus free to set their own bit caps, but they are constrained by all these factors.

The solution to the bit cap problem, observers say, comes back to the same broadband issue: competition. Just as competition between ISPs is likely to cause speeds to go up and prices to come down, so are data caps likely to vanish.

The Government's regulatory action is expected to create better business propositions - and therefore better profit margins - for smaller ISPs.

An overall rise in broadband subscriber numbers, and the resulting traffic increase, should also lead to prices on international and national bandwidth coming down.

The ISP business is also changing, with broadband connections becoming a commodity.

Access providers around the world are having to find new revenue streams - such as video - beyond simply charging customers for an internet connection.

Indeed, Telecom recently announced the formation of a video division, indicating the company plans to offer some sort of video service over its network.

Internet NZ's Davidson said there was no reason for the industry to wait for regulation to set in motion the elimination of bit caps.

"Telecom and the rest of the industry need to give up data caps as soon as possible, just as they had to give up per hour dial-up charging years ago in favour of flat-rate access."