ISPs chase free lunch and a strip show

Telecom needs to get naked if the country's pitiful broadband uptake rate is to improve, rival internet service providers say.

"Naked DSL" was a hot topic of conversation when members of the Internet Service Providers Association met yesterday to discuss strategies for reining in Telecom's broadband dominance.

It is industry jargon for the provision of a digital subscriber line internet connection over a phone company's fixed-line network independent of the telephone service available through the same copper cable running into the home. In other words, it's about getting high-speed DSL internet without having to pay for a phone line as well.

"This is the logical next step for New Zealand to progress broadband competition," says David Diprose, general manager of regulatory affairs for ihug.

But Telecom argues opening its DSL connections to all comers would undermine the viability of its network.

At present Telecom does not allow DSL connections - either to its own Jetstream service or a competitor's broadband product - unless the line in question is already rented for phone services.

But there is no technical reason why a home line cannot be used just for DSL, and Telecom should therefore be pushed to unbundle the two services, Diprose says.

"That would enable competitors, such as ihug, to offer their own voice phone service [using voice over internet technology] much cheaper to the customer," he says.

While voice over internet protocol telephony may be cheap and growing in popularity, call quality is generally accepted to be inferior to the service offered over a dedicated phone line.

Taking a stab at how naked DSL would affect pricing, Diprose suggests: "Instead of paying $40 [the approximate cost of a home line rental] you could pay $20 to an alternate provider and get a much better deal."

Bruce Parkes, Telecom's general manager of government and industry relations, says ihug is "looking to get a free lunch, to get access to what Telecom has invested billions of dollars in over a number of years without making a realistic contribution to the value of that network".

Parkes says Telecom's pricing structure involved recovering the cost of building and maintaining its copper network through phone line rental and DSL.

"If you were to do what ihug are talking about you would completely undermine the economics of providing telecommunications services in New Zealand," he says.

"For Telecom it would mean we would be getting virtually no revenue.

"You would be completely de-linking the revenue Telecom would be receiving from the underlying costs, and over time - and very quickly - there would just not be a sustainable ecosystem for New Zealand telecommunications."

Nevertheless, naked DSL was on the agenda when Diprose, who is also president of the ISP association, and Scott Bartlett, general manager of Quik Internet and the lobby group's vice-president, met Communications Minister David Cunliffe last week.

With the Government murmuring threats that it will review regulations in the likely event that Telecom falls short of meeting a target to sell 83,000 wholesale broadband connections by the end of the year, naked DSL could come into play, Diprose says.

In December 2003 the Government ruled against unbundling, or giving competitors access to Telecom's local loop.

"We're very keen for him [the minister] to revisit that unbundling decision," Diprose says.

"If that's a bit of a big ask, that's where naked DSL comes in - we see it as an easier-to-do next step because it's not a technology change, it's purely a separation of the bitstream product from the phone line."

While Diprose wants, ultimately, to see the local loop unbundled, he knows that would involve making significant changes at each Telecom exchange and would probably take a year to achieve.

So while naked DSL is a "significant step in the right direction for much less effort, it's not the end game - it's just an easy next step", he says.

However, Chris Loh, senior telecommunications analyst at IDC, says implementing naked DSL, while technically simple, would involve a lengthy and complex regulatory and consultative process similar to that undertaken by the Commerce Commission before the Government decided against local loop unbundling two years ago.

"Even though on the face of it uncoupling line access from DSL provision is probably technologically relatively straightforward and it would be really good for the consumer, it's going to be contentious," Loh warns.

"Although the ISPs would really like to see it, the Government can only move so fast."

Loh says naked DSL would be a significant blow to Telecom, which earns more than $1 billion, or about a quarter of its revenue, from local call services.

Naked DSL could spark a "mass migration" of customers away from the telco and force it to rethink its planned $1 billion-plus network infrastructure upgrade, he says.

Cunliffe, meanwhile, isn't showing his hand in regards to what he plans to do if Telecom falls short of its wholesale goal.

"I am currently meeting with leading stakeholders in the industry to hear their views on the state of the market and the major issues they face. I am yet to complete these discussions," he says.

Cunliffe says that following these briefings, he would be seeking advice on a range of options.

"The concept of naked DSL ... will be considered alongside other options."

Dimitri Ypsilanti, head of the telecommunications unit at the OECD's directorate of science, technology and industry, says naked DSL would be a less effective way of encouraging broadband uptake than unbundling. It would only open up a small part of the market - those people who wanted broadband but not a fixed voice service.

"This group of customers would be significantly less than those customers who already have voice but just want broadband access. Thus the effective market for ISPs would be much larger with unbundling."

But Quik Internet's Bartlett said the ISPs would continue to lobby the Government and the industry to adopt naked DSL as an alternative to unbundling.

"For ISPs, an unrestricted naked DSL product would allow us to broaden the range of services we offer, provide significant costs savings for home and business users, and would help promote a level playing field in the market," he says.

Ypsilanti says there is little evidence about the effect naked DSL has when introduced into the market, because it only emerged last year.

A variation is "naked cable" - internet access through cable TV connections. TelstraClear, New Zealand's only significant cable operator, offers its Wellington and Christchurch television subscribers internet access at up to 10MB a second but does not sell the internet service on its own.