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The Itch to Regulate Broadband21 February 2006
The Itch to Regulate Broadband
Last week saw twodevelopments in the broadband debate.
First, Telecomannounced substantial price reductions for broadbandservices at faster speeds. No doubt the moves were driven bysome combination of technological advances, competition,customer pressures and regulatory threats.
Second, thegovernment engaged in some heavy breathing about furtherregulation, repeating claims that New Zealand is laggingbehind other countries in broadband penetration.
Manyurban myths surround the broadband debate.
The reality isthat almost 100% of homes and businesses in New Zealand canaccess broadband capability. New Zealand compares favourablywith the OECD average on this indicator.
The issue mighttherefore be one of affordability. The current level ofpenetration (about 20% of households) puts New Zealand 22ndin the OECD, as the prime minister noted in parliament. Thisis about the same as New Zealand s ranking for income percapita, and broadband uptake is positively correlatedinternationally with incomes.
This suggests one remedy forthe alleged problem is a more effective economic growthstrategy to raise average incomes -- on present policies, NewZealand is not on track to move up the OECD ladder.
Inaddition, the price reductions (including a dollar a dayentry plan) and better services announced by Telecom willimprove affordability. The new prices will be below averageprices in other OECD countries. Further improvements inspeed are in the pipeline with the rollout of the nextgeneration of ADSL.
2 Nevertheless, as the government sstatements indicate, there is always an itch to 'hastenhistory . Customers always want lower prices and competitorsare prone to ask for the helping hand ofregulation.
Regulation could mean local loop unbundling,price controls or other forms of intervention.
All havedownsides. The Commerce Commission wisely changed its mindin 2003 and recommended against local loop unbundling.
Ashas happened so often in the telecommunications industry,that idea could soon be irrelevant. Telephone exchanges maybecome a thing of the past with the next generation network(NGN) which uses internet protocol.
Critics argue thatmost OECD countries have some form of mandated unbundling,but that proves very little. Most OECD countries haveagricultural subsidies too. Governments routinely interveneat the behest of vested interests, not the general publicinterest.
Overseas, unbundling has been fraught withdifficulties. In Britain, where local loop unbundling hasbeen in place for over 5 years, fewer than 300,000 lineshave been unbundled. In New Zealand terms that amounts toaround 20,000 lines, about the number of broadbandconnections Telecom sells every 6 weeks. In Australia thenumber of unbundled loops is also low and the industry isembroiled in major legal and policy debates on theissue.
Dynamic competition based on new technology andhigh rates of investment are far more important for thefuture of telecommunications than 'parasitical competitioninvolving forced access to incumbents networks.
Wheretechnological change is bowling along, over-regulationinhibits investment and the uptake of new technologies.
Toencourage investment, property rights should be respectedand not altered without overcoming a substantial burden ofproof and addressing the issue of compensation.Infrastructure investors won t invest if the environment ishostile and uncertain. Would-be entrants should expect tonegotiate access to facilities on commercial terms, not begiven a 'free ride .
Marketplace competition seldomoperates perfectly, but just because a fish can t flydoesn t mean a rhinoceros can do better. The heavy hand ofregulation is often far worse.
Greater intervention by thegovernment in electricity has led to the current unholy messin that industry. Do we want telecommunications to go theway of state-controlled electricity and roads? Beforecontemplating new regulation of any industry, it is alwayswise to look at current regulations that may be impeding itsperformance.
A case in point in telecommunications is theKiwi Share or Telecommunications Service Obligation, whichhas long outlived its usefulness. Among its many perverseeffects is that it artificially subsidises dial-up internet,to the detriment of broadband uptake.
ISPs and othersclamouring for broadband regulation should be careful whatthey wish for, because they might get it. Regulation begetsmore regulation, as the electricity situation demonstrates.Companies like Vodafone that have concentrated on competingin the marketplace rather than lobbying for governmentfavours have done best.
New Zealand has benefited hugelyby moving from a state-owned telecommunications monopoly toa competitive private industry with relatively lighthandedregulation. We should keep it that way.
Rob McLeod is thechairman of the New Zealand BusinessRoundtable
ENDS
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