Internet wild card in battle to level telcos playing field

By CHRIS BARTON

The taxi driver on the way to the High Court probably spoke for many. "I have to confess I haven't really been following that story, but I'm glad to see Telecom isn't getting it all its own way."

On the face of it, the story is a David and Goliath battle about free internet provider i4free seeking an injunction to stop Telecom strangling its business.

"But what I really want to know is how you can have free internet. There's no such thing as a free lunch."

There are three ways, I tell the driver, that i4free makes money: from running advertising on users' PCs when they're surfing the net - just like advertising on free TV; by taking a cut every time one of its subscribers buys something from an "affiliate" online shop; and by taking a share of Clear's 1.5c a minute interconnect revenue.

"What the hell is that? Is it like a backhander?"

He is sort of right. In the world of telecommunications, interconnect money flows both ways - like a toll gate at the border of two countries. But because the land of Telecom is richly populated with roads in every direction, much more traffic flows into it from Clear, which is a barren land of motorways, sparsely housed by business dwellings.

The result is that Clear pays Telecom at the rate of 3c a minute, amounting to $73 million a year in border crossing fees. In the other direction, Telecom pays Clear at the rate of 1.5c per minute, amounting to only $18 million a year.

After a decade of deregulation, the so-called "level playing field" of a competitive telecommunications environment appears firmly tilted in Telecom's favour. But, as the saying goes, "the internet changes everything." Telecom wasn't really thinking about the net when it signed the interconnect deal with Clear in 1996.

It wishes it had. Clear is now getting home internet users in the land of Telecom to cross the border to Clear, stay online for a long time, and in the process give Clear about $12 million of its total termination payments a year.


Telecom was not pleased, but in June came up with a cunning plan called 0867.

The scheme required all home internet users to change to an 0867-prefix number when they dialled their internet provider. At first Telecom said this was to protect its network, which was being overrun with internet calls.

To encourage users to move to the new numbers, Telecom said those who did not would be charged 2c a minute on their Telecom bill after the first 10 hours a month of surfing the net.

But on April 6, just under a week after i4free launched its free service, Telecom admitted there was a second purpose behind 0867 - to limit Clear's interconnect revenue.

Prior to the 0867 regime, several internet providers were riding the Clear highway and taking a cut of its termination payments - about 0.5c a minute. Under 0867 the money dried up because Telecom declared under the new rules that internet calls would be revenue-neutral.

At first there was outrage. But Telecom had a war chest - ostensibly to ease the marketing and administration costs that internet providers would incur in making the 0867 change. When the second-largest provider, ihug, with 63,000 subscribers, caved in others followed. Ihug had estimated the marketing cost of the move at $500,000, but it turns out it was paid at least $13.3 million.

Ihug director Tim Wood says that confidentiality agreements with Telecom means he cannot comment.

"We solved a variety of issues last year, including 0867. I think you will find most ISPs [internet service providers] got paid, including some carriers, to compensate for whatever issues they all had, not just ihug. Go poke Saturn and see what they got paid," he told Weekend Business by email.

If what Mr Wood says is true, Telecom has in effect bought off the internet providers - compensating them for about a year's worth of termination payments they may have got from Clear.

In the process, Telecom also took many of Clear's internet provider customers because all 0867 lines which start at $40 a month per line are supplied on Telecom's network.

Clear, which had steadfastly refused to join the 0867 regime, had seen its interconnect revenue dwindle to $500,000 a month. It, too, had a cunning plan. It was called 0867 call readdress.

Clear went back to internet providers and offered them connection lines on its network at about a third of the cost of Telecom. Importantly, it used its "number portability" agreement with Telecom to readdress the 0867-prefixed numbers to Clear's network.

The technique still had internet users dialling an 0867 number. But through a complex set of steps, the calls would end up on Clear. The outflanking manoeuvre meant termination payments for those calls were again flowing in Clear's favour.

Telecom cried foul. At first it did not do much except for disconnect-ing and then subsequently reconnect-ing internet provider Web Internet in December. But in March a new phenomenon - free internet - arrived.

The first to get up and running was freenet, a service that offered 10 hours free access a month. On April Fool's Day, i4free was launched. It offered unlimited free internet access using Clear's telephone lines and call readdress from 0867 numbers.

Telecom reacted immediately and disconnected i4free's 0867 numbers.

Through a complex game of hide-the-0867 number and using numbers loaned by other firms, i4free limped through the weekend and signed up 3000 subscribers in two days.

It won an interim High Court injunction to have its numbers reconnected. Two days later, on April 5, Telecom struck again, showing just what its "intelligent network" could do with 0867 calls.

Claiming that a surge in traffic from i4free and freenet was overloading trunk lines in and out of its Auckland Airedale 4 exchange, Telecom limited access. In i4free's case it reduced the number of simultaneous calls from 250 down to 100.

On April 7, i4free won another High Court injunction preventing Telecom from strangling its access. Justice Potter said she found it difficult to accept Telecom did not have "the wit or resources" to manage the overload problem until the full injunction hearing. She ordered that should Telecom have overloading problems, it had to restrict access to all 0867 users across New Zealand, not just i4free.

Awaiting the judge's decision from the hearing on April 11, Telecom has since found a "stop-gap solution" by balancing the traffic load across a number of Airedale 4 trunks.

Meanwhile, i4free has 9000 active users and a total of 17,500 signed up.

But the case before the High Court is only indirectly about whether New Zealand internet consumers have the right to free internet or whether consumers have been harmed by Telecom's 0867 regime.

That battle is still to be fought, with some net users refusing to shift to 0867 numbers and preparing to take Telecom to the Disputes Tribunal over its 2c-a-minute charge on their Telecom bills.

The Commerce Commission is investigating 0867 too and has received advice from the Crown Law Office that the 2c-a- minute charge was likely to breach the Kiwi Share agreement that guarantees free local calling.

What this case is about is how people can do business in the current telecommunications environment. New Zealand is the only country in the world to rely solely on general competition law to protect consumer welfare in the area of telecommunications services.

The Government has begun an inquiry, but will not be able to push any legislative change through until Christmas.

Many internet users, internet providers and Telecom competitors are watching this High Court decision. Will contract law or the anti-competitive provisions of the Commerce Act prevail? For many, that is a question of whether the law is an ass or whether justice will triumph.