Nine countries, pick the middle one

, posted: 8-Sep-2009 07:30

The Commerce Commission approach to termination rates is to compare New Zealand with a short list of countries from around the OECD and see what's going on internationally.

This is fair enough, I suppose, albeit a bit basic.

So how do we look.

The Commission ranks us against nine other countries:

The UK.

Why these nine? They seem a tad random at first glance but the answer is that all nine have built a cost model on how much it costs to deliver calls/TXTs within its own country.

That's very important. They've done the work and produced a cost model that tells the various regulators what it actually costs to deliver calls and TXTs in that own country. Each country has its own issues when it comes to such things so costs need to be worked out locally.

Ironically, the Commerce Commission says it won't be doing one for New Zealand but it is only comparing us with countries that have.

So how do we net out? In New Zealand cents, converted using the 10-year average currency conversion that the Commission prefers:

4.83 France
5.23 Malaysia
6.54 Australia
6.96 Sweden
7.16 Israel
9.53 Norway
10.44 Netherlands
11.77 Denmark
12.52 The UK.

The Commission then picks the middle one. Currently, we're Israel.

I'll say that again. The Commerce Commission is basing its entire model on "pick the middle one".

Look at that list of countries - the range is from just under 5c/minute up to 12.52c/minute. They can't all be right for New Zealand, can they?

Vodafone contacted the company that produced seven of the nine cost models - it's a UK-based firm called Analysys Mason. AM wrote a report for Vodafone (WARNING: PDF) to present to the Commerce Commission about this approach.

In it, AM suggests the Commission's approach is "simplistic and produces a result that risks being inaccurate".

AM points out that using the Commission's own methodology for chosing those countries it will compare NZ with, it misses out a couple of countries that should be included and it doesn't take into account several factors from some of the countries included that would change the result.

"The large variance in benchmarks ... is explained by the fact that TSLRIC-calculated MTAS costs [MTR rates to you and me] are very sensitive to a number of country-specific inputs" which it then goes on to list.

I don't have a problem with simple models. Far from it - having spent two days at the Commerce Commission conference on termination rates, I think some real-world simplicity wouldn't go amiss. But "chose the middle one" strikes me as being appallingly simplistic and runs the risk of us over-regulating - that is, taking so much out of the industry that nobody benefits.

Most regulators take this into account. They run their cost models (remember, we're not doing one) and get a range of numbers. They typically select the 75th percentile and then add a bit to be on the safe side. Why? Because they realise that models are based on theoretically-perfect networks and there will always be an issue with real-world networks that can't be factored in.

The Commerce Commission has moved from using the 75th percentile to using the 50th, giving us those numbers above. It's also moved from using the price set in each country to the cost suggested by the models used in each country. This is important because the Australian ACCC has recently said it thinks its own model is too aggressive and it won't be using the figures. That hasn't stopped the Commerce Commission from including them.

I'd like to see the Commission take a deep breath and build a cost model for New Zealand. I'd like to see some rigour that would stand up to scrutiny a little bit more than "pick the middle one". Surely that's not too much to ask?

Instead, we're Israel, based on a list that appears to have been drawn up with one intention in mind: proving we need to be regulated.


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

Comment by Henare, on 8-Sep-2009 08:27

from this article it seems blindingly obvious we need our own cost model

the commission needs to pull its head out of the sand and do this now to develop a robust and workable model

Author's note by jointhedebate, on 8-Sep-2009 11:28

Hi Henare,

I must say when the regulatory guys explained it to me I was quite stunned.

I was sat there with my pad open, pens at the ready, coffee close to hand and... nine countries, pick the middle one.

I'd expect to see a bit more rigour but this is one of the side effects of not having any merits review. The CC doesn't have to prove anything (as I understand it) if they don't want to.

Vodafone's only alternative is to take the whole thing to the High Court and seek a judicial review but that won't be pleasant for anyone and would just delay the whole thing. That's not ideal either.



Comment by Chris, on 8-Sep-2009 11:29

Paul Brislen you must stop posting this stuff we really don't want to know, your doing our heads in.
You people must be insecure you keep going on about comcom and the MTR's etc, Notice Telecom and 2degrees have kept quiet.

Thank you and good bye

Author's note by jointhedebate, on 8-Sep-2009 11:33

Oh, sorry Chris. I'll take you off my list of people who are required to read the blog and put you on the list of people who can exercise their own discretion and read it if they want to.

How's that?



Comment by Chris, on 8-Sep-2009 11:38

Paul why are you VODAFONE they only ones posting updates about this issue? is your company worried about something? to me you are the bad guys I use to be with Y'all but never again. It seems Telecom and 2degrees are not making a big deal out of this as you people

Comment by michaelt, on 8-Sep-2009 11:56

Chris, while I'm sure there are plenty of good reasons to criticise Vodafone, the fact that they're explaining their position to interested members of the public is not one of them. I'm sure Telecom and 2Degrees have their own views on this issue, they just don't think you're worth the time taken to explain those views.

Personally, I see no reason for further regulation. The fact is, the current system does allow for new competitors to enter the market, the only difference is the strategy these new competitors have used. In the case of 2degrees, they've gone with cheap/free SIM's and prepaid only plans in order to get as many customers as possible, and benefit from termination rates on incoming calls.

Paul, that PR from Parents Inc. and Youthline was a truly cheap shot. I can only assume VF or Telecom pressured them into that, and it's a disgusting tactic.

Comment by Paul Brislen, on 8-Sep-2009 12:07

Hi Michaelt, thanks for your response.

I have to disagree with you about Parents Inc and Youthline, however. At no point did we pressure them or force anyone to write anything or threaten them in any way. If anything, quite the opposite. I was at some pains to point out that this would be a response.

Both Parents Inc and Youthline are two of our more important stakeholders (for want of a better word) and we value their input into our business as much as we value our input into the work they do.

Both parties have issues with technology and the way they're used in social circles - and both have engaged with Vodafone in a very positive way to make sure we understand their concerns. And we talk with them as well about our issues.

When they heard we were fighting this battle both expressed their willingness to get involved. Parents Inc offered to make a verbal submission to the Commerce Commission on its concerns, but procedural issues meant that wasn't an option. A press release was the next option.



Comment by sbiddle, on 8-Sep-2009 12:17

@chris Maybe it doesn't interest you but it certainly interests others.

As for saying 2degrees haven'tr said anything publically, you obviously missed their launch (and support) of the Drop the Rate, Mate! campaign pushing for changes to the MTR costs.

Comment by benedictx, on 8-Sep-2009 13:10

Good work Paul, 
I postulate that the only thing you've done here is to confuse customers about MTRs in attempts to distract them from the fact that at the end of they day we're paying much more than what developed countries do.   
Throw complex equations and mumbo jumbo while rolling on the ground screaming that you're being bullied all you want but people look at our rates, then look overseas and they wonder why we're getting the short end of the stick. It's that simple. 
I understand that you guys are a business after all and making millions every year is expected of a company otherwise why bother setting one up in New Zealand right? 
We lack the variety of mobiles and the ones you sell are expensive, the plans you have are expensive, you don't even have an unlimited data/text/call option! This stunted development of telco offerings and high cost plans prevent Kiwis from progressing technologically with the rest of the world. It's that simple. 
So go ahead, tell us why you need to charge so much for an iPhone and why the plans are so expensive ($NZ250 a month when the 3G was announced yes?). Draw charts and give examples why we pay so much for MTRs and why it's really "good" value. What you'll get is either people begrudgingly accepting it while secretly waiting to jump ship the first chance a better offer appears or those who'll just say thanks and look for another deal elsewhere.

Comment by simon14, on 8-Sep-2009 14:22

How about Vodafone funds an independent study into the cost of text in NZ?

Comment by Paul Brislen, on 8-Sep-2009 14:40

Hi Benedictx,

sadly you're misinformed. New Zealand rates are around the middle of the pack for pricing. Don't believe me? The Commerce Commission and the OECD both say so.

@Simon, I'd love to. But would you trust a report that we'd commissioned? For example, Analysys Mason is the world leader in these things, yet the report into the Commission report has been basically ignored by all concerned in part because it's "tainted" by our involvement.

But frankly, I'd get someone like that to do a report and then we'd be done. No more conferences, no more wasting our time discussing what might be, what might not be happening in a theoretical New Zealand where we're Israel.

And I'd have done it about nine months ago when the Commission started this work.



Comment by hellonearthisman, on 8-Sep-2009 14:58

It just sounds like Vodafone moaning and wanting more delays so they can keep collecting the cream.  Vodafone, you will still be making millions from the people and all the people want it a fair value.

Comment by TinyTim, on 8-Sep-2009 15:01

Perhaps we do need our own model, but there are good statistical reasons for choosing the median value from a list. For example it avoids extreme values from skewing the result if you used the mean value. 

Author's note by jointhedebate, on 8-Sep-2009 15:01

Just trying to explain our point of view.

So how many millions are we allowed to make? How many do we currently make? What's an acceptable level of re-investment in NZ?

Serious questions - very keen to hear your points of view.



Author's note by jointhedebate, on 8-Sep-2009 15:06


that's fine if you've got good data going into the model, but as Analysys Mason points out, the Commission hasn't. It's got data from a skewed list, it's ignored data inputs it should have and it's included data inputs it shouldn't have.

That makes me very nervous.

On top of that, as AM says, there are so many local factors that will influence a cost etsimate that the only real way to do it is to model it properly. The Commission agrees, but isn't going to do that... and I haven't heard a sensible explanation as to why it won't.

We could be done and dusted by now. We could have a model, have had submissions on it, undertakings from the players and that's that. Instead we have had month after month of work laid out in this formal dance between the parties.

I'd rather cut to the chase, myself.



Comment by benedictx, on 8-Sep-2009 15:11

Hey Paul, the report you've given still doesn't explain the high cost of purchasing mobiles nor give an explanation why none of the telcos offer an unlimited plan nor summarizes why we don't have a better selection of mobiles to choose from. 
You want to compare a chart saying we're in the middle tier and it is fine, but let's take an anthropological approach towards this subject. 
Do Kiwis think they're being overcharged? From the people I've spoken to (grocers, cashiers, uni students, doctors, foreigners, etc) the consensus is yes. This brings my hypothesis about people's discontent with the current telco situation. Tell us over and over again that we're getting a "good" deal but we'll just keep looking at other countries (i.e. Australia, Singapore, US, UK) and know we're not. 

Author's note by jointhedebate, on 8-Sep-2009 15:17


That's all down to one thing: competition. You look at the countries with fierce competition and you'll find free handsets (they're not but they're assumed to be free because they cost nothing up front) and unlimited tarrifs (they're also not unlimited but that doesn't appear to stop the marketing folk - incidentally, you won't see those here because the Commerce Commission enforces a truth in advertising clause and any limits at all are ... well, limits).

I'm using actual numbers based on actual research that's repeated over a period of years to determine what customers pay for services (not for the handsets up front, just the services). Case in point - the USA. Dead last in the OECD rankings for all three baskets. Now the US officials are complaining about the ranking structure in just the way Vodafone used to (the OECD doesn't include Best Mate or even Telecom's $10/TXT bundles in its analysis) and the answer given to Vodafone was always the same: tough. This is the measure we use, you know that, move along.



Comment by TinyTim, on 8-Sep-2009 15:19

Don't blame the Commission for wanting to avoiding modelling - look at its track record with models (the TSO model, the LLU CBA model).

Author's note by jointhedebate, on 8-Sep-2009 15:26

@TinyTim, different cost models - they need to outsource it to Wik or Analysys Mason or similar... there are a handful of these crowds around the world and they specialise in such things.

All too late now I fear. Minds have been made up.



Comment by TinyTim, on 8-Sep-2009 16:11

TSO was outsourced to CostQuest and HCPM; LLU CBA was done by Oxera... simply hiring a consultant isn't going to make it work!

Author's note by jointhedebate, on 8-Sep-2009 16:16

@TinyTim, no, good point... Garbage in, garbage out.

But I'd still like a robust model for termination rates. It's GOT to be better than "list nine countries, pick the middle one".

Hasn't it?

He asked hopefully...



Comment by DeroyBoy, on 8-Sep-2009 17:32

Why do people read a blog by Vodafone's king of spin and then get upset that it is one sided. This is just an avenue for Vodafone to try and gain support for their point of view. It is a blog, take every work with a grain of salt. I still find it interesting to read but this is not the only place I go for info on the issue.

Comment by benedictx, on 8-Sep-2009 21:13

So charging NZ$250 a month for the iPhone 3G initially was the only way you could justify turning a profit? One could say you were testing the market to see who would bite. 
Explain why the rates/plans/mobile you charge in New Zealand are much higher than the ones you charge in your other companies overseas. 
For example: The HTC Magic in the UK is free with a 30GBP/NZ$73 a month contract while it costs NZ$519 with a NZ$80 a month one. 
That would make the phone NZ$1752 in total for the UK and NZ$2439 in NZ, NZ$687 difference in price. 
You mentioned it is all about competition, so are you saying that it is the lack of it on our shores that gives Vodafone a reason to charge as high as they want? 
I reiterate, you can say the OECD deems your rates in an acceptable price bracket but that is not how to consumer sees it. Like sports, we put prices/plans/mobiles side by side and we see that we're getting the shorter end of the stick. 

Author's note by jointhedebate, on 9-Sep-2009 08:54


handset subsidies tend to be something that gets ramped up in competitive markets but never forget: these phones are not free. You pay for them either as part of your contract period or through some other mechanism.

In a highly competitive market companies will subsidise handsets and we still do so here but of course we don't lock handsets in NZ so you won't be seeing "have a free unlocked handset with no contract" any time soon from any of the players. It's unsustainable if your customers simply take your "free" unlocked handset and move to another provider. That would quickly become unacceptable to the finance team.



Comment by benedictx, on 9-Sep-2009 09:17

Hey Paul, 
I understand that phones aren't "free" and that we eventually pay for them though our contracts but the example I gave above about the UK HTC Magic vs the NZ HTC Magic had 24-month terms calculated into them and we still pay NZ$687 more than than the UK. 
Also, the UK HTC Magics are sold unlocked under contract as required by Vodafone UK policy so your "because nz mobiles are unlocked" argument is moot. 
Besides, you do have a penalty system in place (by asking them to pay a lump sum depending on how many months are left) should people choose to break their contracts with you so there is no reason why you should be terrified that people would switch telcos. 
There are other countries who prohibit mobile locking as well (i.e. Singapore) and yet they're still selling mobiles for "free" or low cost with 24-month terms because they use the same penalty system you already have.  

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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.

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