Telecommunication's $84 question

By PETER GRIFFIN

Simon Moutter, the man in charge of running Telecom's vast phone network, has been refining his one-liners lately.

Although taking digs at arch-rival TelstraClear comes naturally, the "call4change" campaign, backed by TelstraClear and aimed straight at Telecom, has inspired some real gems.

"It's a misleading argument led by an Australian Government department," he gibes.

He calls the campaign "another Australian under-arm bowl".

The campaign, which argues that Telecom's dominance means most of us pay $84 a year more than we should for our phone rental, was dreamed up by TelstraClear.

It banded together the relative minnows of the telecoms market - ihug, CallPlus, Slingshot and Compass Communications - to blitz the media and urge customers to vote for change in an informal referendum.

That simple appeal veils a deeper cause - to use public opinion to urge the Government to reject Commerce Commission recommendations and open Telecom's network to access by competitors.

In the campaign's first week, 20,000 people called a toll-free number to register votes of support, a drop in the ocean given the 1.4 million residential lines controlled by Telecom alone.

Full-page newspaper advertisements said: "Unless you're living in Wellington or Christchurch you're going to be ripped off this year".

Originally the adverts proclaimed we were being "robbed" by Telecom, but publishers appealed for the language to be toned down.

Telecom's competitors make a compelling case.

In the parts of Wellington, the Kapiti coast and Christchurch, where TelstraClear built its own networks, line rental is 25 per cent lower than in the rest of the country.

TelstraClear charges $29.95 a month for standard phone access. Telecom charges $32.85. But in the rest of NZ, where there is no competing network for residential calling, we pay $39.85 - $7 a month or $84 a year more.

There's the crunch. Under competition law, Telecom is not allowed to sell its services at a loss. So even at $32.85, it is covering its costs.

In areas with competition, consumers have been quick to take advantage.

Kapiti District councillor Gordon Strachan moved to cable operator Saturn in 2000 and pays $29.95 a month for line rental.

Competitive pricing was one factor, he says, but "more importantly for us, 50km out of Wellington, Saturn gave us toll-free calling to Wellington.

"With Telecom, talking to Wellington was and still is a toll call [on a standard plan]."

Tens of thousands of customers take advantage of the reduced rates in Wellington and Christchurch.

Telecom could cut rentals across the country but chooses not to. TelstraClear chief executive Rosemary Howard puts that down to the ability to charge "monopoly rents".

"If I could make the margin they make on local service I'd be delighted," she says.

Howard estimates Telecom's profit margin on phone rental at 60 to 70 per cent, even taking into account the 60,000 customers Telecom claims its loses money servicing as part of its Kiwi Share deal with the Government.

But Telecom disputes that it is creaming massive profits from phone rental and local calling, worth over $1 billion a year in revenue.

"Don't assume our margins are going nowhere fast," warns Moutter, who says the costs of handling increased calling volumes - 3.3 per cent for local calling and 7.8 for national calling this year, according to Sydney-based telecoms analyst Paul Budde - erode the economics of the business.

The argument has some merit, says Budde, as unlimited local calling allows Kiwis to stay on the internet, tying up the network.

"The internet remains a thorn in Telecom's side where the 'free' local calls philosophy is concerned. It estimates upwards of 60 per cent of residential local traffic is internet-related calling," he wrote in a recent report.

Nevertheless, Telecom has been ratcheting up prices in other areas.

There have been two line rental increases in two years - both in line with increases in the consumers price index, which Telecom is not allowed to stray above.

In January 2003, it also introduced a late payment fee of $6 to recover $17 million it claims it wears in late-payment costs each year.

A $2.24 line maintenance fee has also been introduced, although customers can chose to opt out of it. Add-on services such as CallMinder bump up the average customer's spending.

"Telecom is required to have and wishes to have a flat rate for access and free local calling nationwide. It forces us to yield a small cross-subsidy," says Moutter.

He puts that down to two reasons: we like "egalitarian" telecoms access, and the Kiwi Share says hard-to-reach areas cannot be charged more for access than urban areas.

"Aucklanders do care that their country cousins get a reasonable price for being on the phone," says Moutter.

The other carriers want the Kiwi Share abolished as they have to subsidise the losses Telecom suffers in those obligations - some $65.7 million a year. But local loop unbundling - opening Telecom's network to competitors - is top on their wish list, hence the expensive newspaper advertisements.

Telecom smells a rat, however: in TelstraClear's submission to the Commerce Commission on local loop unbundling, there's a line saying that full unbundling will do nothing to help it deliver cheaper calling to New Zealand households. Moutter says it's a contradiction. So why is TelstraClear pushing for full unbundling?

Howard says the company would use Telecom's copper wires to launch its own services further down the track, using cheaper wholesale products to gain a foothold nationally in the meantime.

"We'll do it exchange by exchange," says Howard.

"This is much more than a question of internet access. We want to be able to provide different call products. Not to enable us to do that re-monopolises Telecom."

Across the Tasman, Telecom's operation, AAPT, is running a business based on regulatory concessions that allow it to buy wholesale services from Telstra. Local loop unbundling is the rule but it's not used by AAPT to reach the residential market. Not yet anyway.

While TelstraClear slams Telecom's line rental charges here, back home parent Telstra faces criticism from politicians who claim that its profits are propped up by inflated line rental fees. Hence, Moutter's stinging one-liners.

Telecom says Telstra has lifted line rentals by 54 per cent in the past four years, versus 9.7 per cent at Telecom.

Howard has a different view: Telstra has been rebalancing its charges, increasing line rental but lowering calling costs.

Telstra's line rental starts at A$23.50, with a charge of 20c a call. The Kiwi Share precludes this type of charging here.

Ernie Newman, chief executive of the Telecommunications Users Association, says the prospect of Telecom's competitors being shut out of the local loop is dumbfounding overseas observers.

"The comments from colleagues around the world range from gentle ribbing to absolute incredulity," says Newman, who believes the telcos have picked up on the populist pricing issue to "attract the layman's attention".

"The principle of what is being said in these ads is absolutely correct. The issue is New Zealand's economic development," says Newman.

For Slingshot boss and call4change campaigner Annette Presley, the outcome on unbundling will determine her future involvement in the market here.

Presley last night flew out to Sydney, where she is investing $5 million building up the Australian arm of sister company CallPlus.

"CallPlus [in New Zealand] isn't for sale, we're not leaving the country," she says, "but we run a mature business and it's more sensible to invest our money [in Australia]."

With unbundling, says Presley, Slingshot and CallPlus would sell cut-price high-speed internet deals and enter the local calling market in competition with Telecom.

"[The network] may be a dinosaur, but at least it gives access to 90 per cent of New Zealanders," she says.

"They [Telecom] are an 82 per cent overseas-owned company and they have a commitment to provide the highest rate of return to shareholders possible," she says. "Telecom can't be responsible for the social conscience of New Zealand."

But the Government can, Presley argues, and the campaign will continue until that message is driven home.