MTAS Conference Day II

, posted: 3-Sep-2009 08:24

The morning kicks off with a quick chat about glide paths - do we introduce regulated prices overnight or follow the international lead and lower them over a period of time, and if so, how long should that period be.

Strangely, Two Degrees says no glide path and the operators say they should have a glide path.

TUANZ feels there's already been a glide path and that's enough for him thanks.

Commission questions TUANZ on the impact of the shock of a sudden drop and the waterbed effect.

TUANZ says there's no weight on the waterbed effect and he'll happily live with the consequences. Good on ya, Ernie.

Also says investors should have realised this would happen and that's that.

Q: TXT spam

Vodafone submitted that reduced SMS termination rates could lead to increased levels of spam on mobiles.

Vodafone: today we block 97 to98% of emails because they're spam. With email you have, in effect, a BAK system. No reason why that won't happen in SMS. Spam TXTs are generated by a machine, it's one way, there's no response and results in huge imbalances. There would be a huge cost in spam filtering for mobiles.

Two Degrees wonders why spam isn't already happening today on mobiles given international BAK.

Vodafone: As soon as we see imbalance we move away from BAK and move to a charged model. It stops the spam up front.

Vodafone's international contracts are based on person to person SMS and if they do move away from that model, we put them on a charged model.

Commission: if introduced BAK with a 10% mandatory limit on imbalance would that address TXT spam issue?

Vodafone: Yes.

CallPlus: but we have free local calling, does that encourage spam? We have free dial-up internet access, does that encourage spam?

well, yes... it does. Clearly CallPlus has never had a call from a telemarketer at dinner time. See also Fair Go.

Commission: Why has Telecom not seen this spam but Vodafone has?

Vodafone: Historically, the majority of the international roaming arrangements were with Vodafone ... GSM versus CDMA issue.

Commission moves on to Counterfactual

The counterfactual is the alternative to regulation (known as the factual).

Telecom: Should an undertaking be considered a factual or counterfactual. The Undertakings are a form of regulation, just a different to traditional regulation. The counterfactual should be the rate in the market today.

Telecom doesn't think you can accept multiple undertakings as they conflict. Doesn't want asymmetry in the market.

Kordia: Concerns that Telecom's undertaking would be thrust upon the industry should the undertaking be accepted. Would lead to no regulation. Too dangerous!

Surely that would mean you'd never accept an undertaking in that situation...? Just saying.

Kordia says commercial deals that aren't listed as undertakings should be ignored by the commission.

Two Degrees: We know what happened in fixed to mobile process (Deeds of Undertaking) and the risk of an ongoing undertakings regime. All this has gone on too long and undertakings are part of regulatory delay.

Vodafone: We need to address the concerns around process at some point. Very important issue to raise there.

Undertakings are part of the Act so we have to work with it. Only had two processes that have used Undertakings - national roaming and now this one. More complex, multi access providers involved and how does that affect undertakings.

Asymmetry wouldn't be Vodafone's preference either. There is some asymmetry in the Deeds of Undertaking because there are two Deeds - Crown and Vodafone and Crown and Telecom - and they were negotiated separately.

Do believe commercial deal with Two Degrees should be part of the counterfactual. No Commission work has been done to see whether the deal is better for Two Degrees than regulation. That work needs to be done.

Discussion at length about the commercial deal between Vodafone and Two Degrees.

This blog is mentioned - although inaccurately. Nice to see Two Degrees reading the info. Waves. Waves again.

Commission decides to have a closed session to discuss confidential informatioin. And so, out for a coffee.

1030am: And we're back. Don't know what went on but everyone looks happy. Can't be a good thing, surely?

Now to discuss "Benefits and detriments of fixed to mobile termination regulation". I don't know about you but I for one can't wait.

OK, that was quite tedious and economic.

Now we turn to the Vodafone assertion that the Commission hasn't done enough cost modelling to look into the costs and impacts in three of the four areas under review. The Commission has modelled only the impacts on Fixed to Mobile but not Mobile to Mobile, TXT or International Origination calling.

Vodafone says it needs such modelling and analysis to show that the regulation being proposed are actually going to deliver material benefit. The two-way nature of MTM and TXT bring that into doubt and yet the Commission has no models in these areas and has no numbers/analysis on these areas.

The Commission says FTM is an established market with historical assumptions. The mobile market is new and unpredictable and so the Commission has taken a different approach. The market is so new and rapidly evolving that it can't model it.

Surely that means there's no need to regulate until we see what this market is capable of doing?

Telecom: surprised there was no cost-benefit model for MTM given there is no more difficulty in modelling MTM than in FTM. Adds a great discipline to the process and should be undertaken from a public policy framework point of view.

Interesting chat about whether it's too hard or whether it's completely necessary.

Now on to pass through and how important that is.

Vodafone raised the lack of pass through among fixed line operators and how that impacts on the mobile market (mobile gets regulated, fixed benefits, customers curse mobile for not lowering prices, rinse repeat).

TelstraClear: it's all about bundles. Everyone bundles. We compete against companies offering individual products that are sold as a loss leader. Fixed providers cross-subsidise using lower rates.

TelstraClear suggests there is strong pass through occuring even in Australia ... which is entertaining.

CallPlus: Bundling driven by mobile operators. Fixed operators and small operators like CP can't win fighting against such bundles and not passing on savings is one way it can gain margin. The notion that dropping a wholesale price over here should affect the retail price over there is a nonsense.

Kordia: Rejects assertion that Vodafone has made. This is a lobbying game and belittles the process. Rejects the assertion that there's no pass through here.

Commission: does Telecom share Vodafone's view?

Telecom: It sounds great but it's not how the fixed market works. Margins are only going one way on calling (I assume he means down but that's not the information I've seen... margins have increased hugely over the past five years in fixed line calling).

Commission: Does Vodafone still maintain these operators are rorting the situation?

Vodafone: Is the market perfectly competitive already in the fixed line market so you can be confident that 100% passthrough would occur. I don't think you can be of that view.

Evidence is that margins in FTM have increased. FTM prices aren't coming down in bundles or out of bundles. We're being asked to take as "article of faith" that pass through is going on. I look at the numbers and I see the margin is growing and I have nothing to say termination rates are being passed through at all.

TUANZ: in a sense users are never satisfied with level of pricing and competition. The fixed market for voice is healthy and competitive and have no problem with pass through being in bundles but it's one part of the market that's working reasonably well. Don't accept the argument.

Vodafone asks question of TUANZ via chair. Vodafone and Telecom's Deeds include 100% pass through... does TUANZ see that as valuable and having that commitment provides benefit to customers.

TUANZ: that's an argument in the short term sense but if you're incorporating pass through in that way into the regulatory process it becomes retail price regulation and we're not sure that's the way we want to go. We're sure it will be passed through in the normal commercial process even if it takes a little longer.

Waterbed effect

Telecom: Changed incentives drive waterbed effect. If you push down MTRs the marginal revenue per customer is dropped and that will have an impact.

In real world it's not a simple matter of picking up revenue elsewhere, the waterbed effect actually changes the way you view customers and influences all of market, subsidies etc...

Some complex economic arguments going on here... well over my head I'm afraid.

Some talk about providing clarity to the end users re: charges at wholesale level being visible at retail level and how to achieve that and if in fact we can achieve that.

Discussion on whether entry of a new player will impact on waterbed effects. Plenty of assertions, plenty of discussion. Limited agreement.


Discussion on allow final undertakings to be put in by October 2. Previously the Commission had said we needed to put in our submissions before the conference itself, which is odd because we still don't understand a lot about the model they've provided and we need three more models for the other services. Now at least we'll get an opportunity to put in something that may be more acceptable to all concerned.

Whistling through the agenda, we're now at: "Other issues parties may wish to raise"... Wooh!

CallPlus has an issue around toll free traffic. Vodafone has passed on the savings via the Deed but CP says Telecom has not. The issue's real and needs addressing.

TUANZ agrees. More people are calling 0800 from mobiles but those volumes are not offset by reductions in the pricing. Large businesses are starting to reject calls from mobiles to 0800.

Commission says Undertakings may include a solution to the problem if they wish.

Kordia: issue around margin squeeze. CP and Kordia have sought a margin squeeze imputation test to be added.

Suggests on-net and off-net pricing regimes are classic margin squeeze. Bundles are also an issue as they can include loss leading/below cost pricing.

Can't have retail price regulation so the only way is to introduce a margin squeeze test at wholesale level.

Commission says not an issue that can be addressed in the process we're engaged in today.

Kordia disagrees. At length.

Vodafone suggests this is an issue for the Commerce Act rather than Telco Act as it's a retail price issue not a wholesale issue.

Telecom also thinks that's the best way to go.

Two Degrees says it would like retail control (!) and has sympathy for Kordia's position. Wants on net pricing issue addressed at some point in some way by some one.

TUANZ: Sounds like an issue TUANZ ought to take an interest in.

Commission: not subject for consideration under this process. More properly fits in under Commerce Act and would be better to wait for this process to conclude and then address it if it is still there.

Sense of relief washes around the room as we reach:

Closing Statements

TUANZ - I was going to write this during the afternoon tea break but we're a bit quick. Hilarity ensues.

Reiteration of TUANZ position - leg up for new entrants needed. Problem exists now. We don't revel in regulation but bottleneck issues need sorting out. Everyone at the table believes an open market is the answer. Looks forward to see what comes up in the undertakings.

Vodafone: Position remains: no evidence to depart from TSLRIC when considering termination rates either above or below TSLRIC.

No precise answer to what TSLRIC is and there are a range of pieces of evidence to consider.

Two views: on one hand regulate quickly, aim for the lowest number. This is the Two Degrees view. Implies a large difference between factual and counterfactual cases.

No evidence that small operators are exiting markets around the world because of high MTR.
In NZ two pieces of evidence to consider: termination rates above TSLRIC in SMS a number of years ago did not prevent pricing of attractive offers by Telecom.

Second point: if there is an issue around customers locked in by on-net pricing it's a very small number. About 20% of Vodafone voice customers are on on-net tarrifs, and 15% of Vodafone customers are on on-net tarrifs.

To the extent there is a market entry problem it applies to a small minority of contestable customers in the NZ market.

Beyond that, those customers who are tied in to on-net pricing are given access not to all Vodafone's customer base but to one, two or three on-net customers. Different if the on-net pricing was extended to the wider base. He's talking about Best Mate and Family offers.

Third consideration is the commercial deal with Two Degrees.

Fourth consideration is there's no evidence of major or massive market failure as a result of the market structure in NZ today. The market in NZ is not unusual compared with markets around the world. No evidence to suggest there is a different problelm of interconnection breakdown (ie can't communicate between networks in NZ).

Customers are not dumb objects to go where they're put. They move and switch as they wish and there's no impediment to that.

Competition will produce lower prices and that's a good thing. But the Commission should be considering to what degree will competition change should MTR be reduced. The Commission should follow international best practice and err on the side of caution not on the side of radical slashing of rates.

There is also an issue regarding investment that should be in mind when looking at the regime.

Roger Kerr from Business Roundtable has joined us in time for closing submissions

BRT has long held interest in the sector.

1: What is at stake in the inquiry? Draft report says $50-$100m over five years. That's $30-$60 per household - a tank of petrol over five years. That may be overstated by up to eight times. BRT questions several of the assumptions and the net gain is trivial.

NZ can't carry on like this, tying up the time of Commission, staff, CEOs, etc. It creates lobbying, investment uncertainty. Our productivity performance is lousy.

2: Rule of law issue. Hugely important for investment certainty. The Draft report overturns those Deeds of Undertaking. We see that as unconsionable (sp). it's a totally unsatisfactory approach. They affect investors' perceptions of New Zealand. Imagine a CEO going to the board for tens of millions of dollars in NZ. The first question they'll be asked is why should we bother in NZ if we'll have the rules changed on us?

3: Issue of regulatory impact statement. Cabinet manual requires these RIS. We think the ComCom should adopt the RIS framework and have regard for the guidelines on property rights.

The final report must contain far more rigorous analysis and demonstrate greater gains to support any proposals to regulate. Otherwise we recommend you should abandon proposals.

On no account should the rules be changed before the Deeds are completed in 2011.

Two Degrees: NZ has virtually closed networks. The studies we have show entire cities that are on one network or the other. Going back to the Fletcher Inquiry any to any networks are important. It's ridiculous that people have to own multiple handsets to call between networks. Of course, 2D's own research shows this is only 3% of the population.

We recognise the difficulty of modelling. The clear distinction between fixed line and mobile services is fading. What you can do with a mobile phone these days (email, social networks, skype, google, etc) is amazing and then compare with fixed lines that are extended out of the house (eg Home Zone) and down the street. Then we add in femto cells and the like and the distinction between the two is blurred.

The idea of paying one set of providers a rate that exceeds the fixed line world by an order of magnitude is a left-over from the last century. 4G is all about data and the allocated cost of voice is going to fall.

Incumbent mobile network operators are being subsidised by fixed line players paying for these costs.

There's been some discussion about investment. Two Degrees has invested "fresh money" in New Zealand. Vodafone invests where termination rates are low like India.

Telecom: you need to use TSLRIC to work out the cost. We hold to the position that the Commission should adhere to international principle and introduce a glidepath and hold the view that the benchmark should also be capable of dealing with glidepaths created by informed commissioners based on TSLRIC modelling.

We know nobody knows what that cost is. We can get to a range and the Commission will have to make a decision. That's good for us and for New Zealand. Not having to spend the next two years fighting about TSLRIC modelling will be good for my sanity.

Opportunity to put in another undertaking is a good thing.

Telecom will come back with a revised undertaking that seeks to reflect the views around the table.

But there are things that are going on we disagree with. Lots of talk about anti-competitive strategies being adopted and this has gone on for several years over roaming, over co-location and over termination rates.

You find the market the way it is because that's how it's evolved. There's no master plan setting the entry level for new players.

Still waiting for evidence that termination rates have any influence on Two Degrees' entry into the market. We often feel like the little player fighting big Vodafone but we never thought cutting termination rates in half would do it. What will compete is getting great handsets. It's giving good coverage. It's getting a compelling roaming proposition. It's introducing market changing pricing constructs like $10TXT. No on-net off-net differential. Those are the kinds of things that will drive the market and give you market share.

At the end of the day we've got complete uncertainty as to what benefits there will be in reducing termination rates for Two Degrees' entry. On the other hand we know significant drops in termination rates will have a significant impact on our customers. That's why we have to take a measured and careful approach to regulating termination rates.

Commissioner sums up, thanks the parties, especially thanks the economists who've played an invaluable role. Got through a large amount of complicated material very quickly.

Thanks the stenographer and commissioners, staff and WIC who have helped.

And now we're done. If you're read this far... well you need to get out more. I know I do.

Other related posts:
Of termination rates and regulatory holidays
Minister recommends regulation - Vodafone's response
Vodafone's response to the Commerce Commission's report

Permalink to MTAS Conference Day II | Add a comment (4 comments) | Main Index

Comment by freitasm, on 3-Sep-2009 23:12

"And now we're done. If you're read this far... well you need to get out more. I know I do."

Reading this at 11pm. Should grab a coffee. Good reporting on the whole thing really.

Comment by sbiddle, on 4-Sep-2009 08:47

Thanks fopr the great work keeping us up to date Paul.

Shame none of the media deemed this a newsworthy event!

Comment by Paul Brislen, on 4-Sep-2009 09:34

Thanks for that guys. I really think it's important that this kind of work is seen in the light of day... all too easy to leave it to the "experts" to decide, and having seen them at work I can safely say the more light we shine the happier we should be. Cheers Paul

Comment by Steve M, on 8-Sep-2009 16:01

A more honest / accurate (and less biased) account of what actually happened can be found here:

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jointhedebate's profile

Paul Brislen
New Zealand

You’ll have heard about mobile termination rates and how the Commerce Commission is investigating whether or not to regulate them. But what is a mobile termination rate, how does it work and why is it so important?

In this blog, we’ll try to answer your questions, tell you a bit about what we think and keep you up to date with the Commerce Commission and its process.

Recent comments

jointhedebate on Of termination rates and regulatory holidays: @StevenON, it's not MTR that introduces on-net/off-net pricing - it's marketing....

jjero on Of termination rates and regulatory holidays: You quote the amount of people in the public that think there won't be a substan...

grant_k on Of termination rates and regulatory holidays: This spectacle of Vodafone crying over spilt milk makes me about ready to puke.....

SteveON on Of termination rates and regulatory holidays: I spent a little time looking @ VF Ireland and am very surprised at their lack o...

jointhedebate on Of termination rates and regulatory holidays: @langi27 you're not required to read it - this is a place where we wanted to tal...

langi27 on Of termination rates and regulatory holidays: I don't understand why you continue to try to convince the public that your stil...

jointhedebate on Of termination rates and regulatory holidays: @rewa, that's a different kind of termination rate. You pay an early termination...

ockel on Of termination rates and regulatory holidays: @dannywii - the US is the biggest smartphone market in the world (by share - see...

rewa hard on Of termination rates and regulatory holidays: I agree with dannywii and I have had a number of corporate accounts with Vodafon...

jointhedebate on Of termination rates and regulatory holidays: In order:@myndlyz We have 49c/minute calling and we also offer $6/month call and...

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