New tech could see Telecom lose grip

By RICHARD BRADDELL

WELLINGTON - The Government's telecommunications inquiry was prompted by the alleged wrongs of the past, but it faces the even more difficult task of second-guessing the future.

That is not just because Telecom has said it should be forward-looking, but because burgeoning new technologies will open the market in ways we can still only dream of.

As Dr Chris Doyle, a London-based economist commissioned by Telecom to report on local access technologies, said last week, Telecom's grip on the local telephony market will loosen as new, mostly broadband, technologies turn local access into a battlefield.

Already, Sky Television is poised to provide high-speed internet via satellite, while Telstra Saturn is offering high-speed internet access through cable modems, competing with Telecom's Jetstream DSL broadband service.

In future, it seems reasonable to add fixed wireless delivery, including Clear's new LMDS technology.

All this has implications for the Kiwi Share, which enshrines free local residential calling, including rural users.

Dr Doyle said if the Kiwi Share were not reviewed, Telecom would face increasing difficulty as competitors cherry-picked high-margin urban markets and left it to foot the bill on loss-making rural customers.

Dr Doyle's dire projection assumes that interconnection is fairly priced, using a cost-based methodology. But Telecom's fixed-wire competitors have argued for years that interconnection costs look more like monopoly rents disguised as Telecom shouldering the burden of the Kiwi Share.

Dr Doyle went on to confirm what most new entrants have been saying all along, that interconnection prices have to accurately reflect costs, or they will distort investment signals.

One solution is for all players to contribute proportionately to the kitty, which then compensates whoever happens to be bearing losses on the Kiwi Share's universal service obligation. Alternatively, Dr Doyle suggested that since the Kiwi Share was intended to serve social rather than commercial objectives, losses should be met out of the public purse.

How much the Kiwi share will matter in a world of high-speed internet access is a moot point. Dr Doyle's thesis is that Telecom's competitors have little incentive to rush out broadband services to rural markets in the near future and will instead cherry-pick high profit urban markets.

The Catch 22 is that Telecom also has reason to defer rural upgrades because capital investment will now be rendered obsolete as more cost-effective technologies emerge over the next five years.

But is the rural market as bad as all that? Aside from sparse populations, the key argument against upgrading Telecom's copper to broadband standard is that rural users tend to be a long way from the exchanges and DSL services deteriorate markedly over distance. That is true of outlying farms. But small towns like Kaikoura may be a different story.

Isolated they may be, but the need for high-speed internet may be far greater in the country. In Auckland, the nearest video shop or bank is a few minutes away; in the country, it could be an hour's drive.

Though Telecom has signalled that it does not see much immediate scope for rural DSL, competitors might think otherwise. One advantage of DSL is that it is scalable, meaning the investment required in modems and exchange equipment is closely related to demand.

The message is obvious.The 56k modem now standard for internet access should become history, as falling broadband prices bring faster internet speeds demanded by consumers.

While Telecom has so far lost the battle to have the Kiwi Share confined to voice, the fact that more and more internet users will opt for broadband will make it increasingly irrelevant because no one has suggested broadband access should be covered by the Kiwi Share.

The picture becomes even more interesting given that traditional telephone exchange voice-switching is going to give way in the not-too-distant future to packet switching, which will treat voice calls as data.

Telecom's Neax exchange equipment was installed in the early to mid-1980s when the company was still part of the Post Office. The widespread view, and Telecom seems to agree, is that it will have to replace that equipment soon or become increasingly disadvantaged.

But when it happens, the traditional view of calling as time-based will erode. With packet switching, voice's share of network resources will shrink even faster than with today's burgeoning internet traffic.

Voice demands infinitesimal bandwidth, about 4.5k, compared with the 1.5mb/s slowest speed typical with DSL. In that equation, telcos will increasingly want to sell high-value broadband, potentially using voice as a loss leader. Will that mean giving voice away? Possibly, even on long distance.

Could that eliminate a role for a Kiwi Share universal service obligation?

That ultimately is a question for the Government. If it regards broadband internet as a service everybody in a modern economy should have, then that would call for its widening.