Counting the cost of calling

Meet New Zealand's newest mobile phone lobbyists - 16-year-olds Sam Turner and David Bullock.

The Hutt Valley High School students are the winners of an Econet Wireless contest that asked students to compare mobile phone calling prices in Organisation for Economic Co-operation and Development (OECD) countries.

The duo's research confirmed what has been accepted for some time - that New Zealand's prices are among the highest in the OECD.

Performing the study was illuminating for Turner and Bullock, who are now both firmly in favour of Government intervention.

"The Government should step in and regulate the market," Turner says.

Adds Bullock: "It's a bit like the unbundling situation in broadband."

With the Government now examining further mobile regulation, the "unbundling of the mobile loop" is a very real possibility.

The OECD and the Ministry of Economic Development track prices for low, medium and heavy users.

The ministry's most recent report, issued in December and based on OECD figures from February last year, found mobile phone users were paying some of the highest prices in the OECD.

In value terms, medium users were paying the highest rates in the 30-member OECD. Low users were 23rd and heavy users were 29th.

New Zealand has also failed to attract a third mobile competitor, despite considerations by TelstraClear and Econet, leaving Telecom and Vodafone to evenly split the $2 billion-plus market.

Taken notice

The Government has taken notice and, with its landmark broadband regulation announcement in May, introduced the possibility of further intervention in the mobile phone industry.

The Commerce Commission has been instructed to review the industry, and Telecom and Vodafone could face a regulation on mobiles.

But is further regulation necessary? The two companies say competition between them is alive and well, and prices are coming down naturally. Their claims have been met with disbelieving scoffs - they have been accused of running a duopoly, and Econet project manager Tex Edwards has referred to their competition as a "pillow fight".

Yet new OECD statistics seem to bear out the claims.

New Zealand has made a stunning reversal in pricing trends over the past year. Figures from February this year show low user prices have improved to 17th from 23rd, medium users to 11th from 30th, and heavy users to 14th from 29th. New Zealand has moved from the most expensive on the list to the middle of the pack in the past year.

Rather than giving an "I told you so" response, Vodafone's regulatory manager, Hayden Glass, downplayed the improvement.

Part of the positive results had to do with a change in the OECD's methodology, which had probably made New Zealand look better than it was, he said.

That should emphasise that any single set of statistics should be looked at with caution.

"Cross-country comparisons are both illuminating and extremely dangerous," he said.

The standard

While Vodafone didn't necessarily agree with the ratings, the company had accepted they were the standard.

Telecom and Vodafone have been
criticised for trying to influence the measuring methodology, but the OECD denies lobbying from any firms has had any effect.

"NZ does a lot better than before [in the new figures], but I don't think it can be tied to Telecom's participation in the meeting," said OECD statistician Taylor Reynolds.

"We had to reshape the baskets based on typical usage across the OECD, and the usage updates seem to have helped New Zealand related to other countries."

But New Zealand could still benefit from more operators, Reynolds says.

Prices are still high and use of mobile services is relatively low. New Zealand has 86 subscribers per 100 inhabitants, which is above the OECD average of 72, but poor enough to rank the country 18th.

Part of the problem, he says, is that Telecom and Vodafone use different technologies - CDMA and GSM respectively.

GSM phones use Sim cards that customers can switch between phones. CDMA handsets do not, which keeps customers from jumping between networks.

Competitors on each network would help lower prices, Reynolds says. Telecom's potential move on to GSM would also likely help.

The two companies also cite New Zealand's mobile use rate as evidence that customers aren't finding prices too high. With 3.8 million connections, New Zealand's penetration rate is about 96 per cent.

But that number is somewhat inflated, says IDC telecommunications analyst Chris Loh. A good portion of mobile subscription growth over the past six months has come not from human customers, but from telemetry - or devices that communicate with each other.

"If you add 15,000 [telemetry devices] to a quarter, that really starts ramping up the numbers," he says.

Immature

New Zealand still has an immature mobile market, Loh says, evidenced by the proportion of call minutes made over cellphones versus landlines. Many European countries are over 50 per cent; New Zealand is at the bottom of the pack with about 15 per cent.

Free local calling may explain some of that, but it is a secondary cause, Loh says.

"The main thing is that we have very high service pricing compared to other countries. That is an inhibitor to usage."

Vodafone agrees there is "huge scope" to increase overall use. New Zealand ranks 12th in total minutes spent on mobile phones - about 90 a month for each user - in the 16 countries in which Vodafone operates (Egypt is first with about 230 minutes a user).

Vodafone disagrees that New Zealand prices are high. They are the middle of the 16 countries, Glass says, although he declined to give specific numbers.

More thorny than prices is the issue of new mobile providers. Several potential entrants have complained that Telecom and Vodafone have put up road blocks to keep them out of the market, and that the existing regulatory set-up inhibits their ability to build a network.

TelstraClear says New Zealand lacks clear rules on issues such as roaming, which allows one company's customers to move on to another company's network when they leave their own company's coverage area.

The Telecommunications Act does enforce roaming where a commercial deal between operators cannot be reached, but a new entrant must first build a network covering 10 per cent of the country to qualify.

The clause is vague because it doesn't specify whether the entrant must service 10 per cent of the population or the geography, says TelstraClear's head of strategy and new ventures, Keith Miller.

The act also doesn't specify a price for the regulated roaming, which means TelstraClear could spend a lot of money building a network, only to end up with an unfeasible roaming price from Vodafone.

"You have to take a look at that and think if it takes years and hundreds of millions of dollars to build a mobile network, why would you put that money at risk if it's unclear what the roaming provisions are, when you would get it and at what terms?"

TelstraClear had its hopes of building a third network dashed in November by Australian parent Telstra, which couldn't justify the huge expenditure because of an "ugly" regulatory situation. The broadband outlook has improved, Millar says, but the mobile situation is still an issue.

Vodafone's Glass disputes the criticism and questions TelstraClear's and Econet's commitment to building. Vodafone had standard roaming prices, which it applied to competitors such as Telecom and BCL, and no evidence suggested it would demand unfeasible charges of a new entrant.

"If you're not committed to building infrastructure, why should the Government be giving you this leg up in the first place?" he says.

But the absence of a healthy mobile wholesale market is also working against Telecom and Vodafone.

Mobile virtual network operators (MVNOs) - companies that resell airtime of network owners as their own brands - are springing up overseas as an alternative to expensive and time-consuming construction.

Telecom and Vodafone have had commercial discussions with potential providers, but so far no MVNO has materialised.

That could spur the Government to enforce regulated MVNOs - an emerging trend in the OECD, Reynolds says.

Internet-only providers, such as ihug in New Zealand, are at a competitive disadvantage to full-service providers such as Telecom, which can give customers bundled discounts on broadband and mobile packages.

A lack of a mobile offering can thus defeat the point of any broadband regulation, Reynolds says.

"MVNO activity will also increase as competitive operators start moving into the unbundled market. Using an MVNO they can become a full-service [telecommunications] shop in no time."

Turner and Bullock, the student researchers, certainly hope so. In the meantime, they'll each enjoy the prize they won in the Econet contest - a Vodafone mobile phone.

What we pay

Average monthly spending (in US$), plus OECD ranking out of 30 (February 2006 and 2005 ranking respectively)

Low user: $208.64 (17th from 23rd).
Medium user: $391.21 (11th from 30th).
High user: $602.60 (14th from 29th).
Uptake (subscribers per 100 inhabitants): 86.
OECD rank: 18 out of 30.