Telecom scraping rural investments.

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hellonearthisman

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Topic # 17856 14-Dec-2007 22:05

I wrote in my blog this and got a couple of comments, and thought I should say it in the forum.

I read Chris Barton: in the NZHerald

NZHerald Quotes:
That's
bad and made worse when you consider the paltry $22 million a year
Telecom has invested on its rural network over the past 13 years,
covering both growth and replacement investment.
...
Adding
insult to injury, Telecom actually receives around $25 million a year
in subsidies from the rest of the telecommunications industry for
providing this clapped-out service.
...
rapacious monopoly power

What a steal, telecom was payed by other telco providers to matain a network, and that telecom scraped off 3 million a year from it.

The money was for the network, not for telecoms pockets. The pocket money should come thru the use of the network.

cokemaster

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Reply # 100052 15-Dec-2007 00:17

If the government increased their focus on education more, the above post would be significantly improved.

At the end of the day you have people with their opinions, and people who agree with others opinions...

I don't agree with a lot of what was written as I feel that DSL (particularly vDSL) for rural environments is a bit limiting, opting for existing options such as satellite or wireless is much better.

Clearly you think otherwise - good on you.

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hellonearthisman

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Reply # 100053 15-Dec-2007 00:27

No, I think it bad that when give 25million they only spend 22million and pocket the rest.

And my spell checkers has gone awol, but that's like complaining symantic's or spelling.

cokemaster

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Reply # 100054 15-Dec-2007 00:29

Do you have a source on this? Details? Or is this another 'Chinese whisper'?

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KiwiOverseas66

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Reply # 100060 15-Dec-2007 04:28

I agree with cokemaster on this one - primarily because modern day journalism seems to have a habit of quoting conjecture dressed up as maths (i.e - one of my favourties - "you're 62% more likely to suffer serious injury if hit by a 4x4 in a residential area with bullbars, then without" - newsflash, if you get hit by a two ton vehicle, its gonna hurt).

So is the $22 million quoted just capital expenditure? What about operational and maintenance costs? How much does it cost to send a contractor from Gisborne to the east cape to repair or install a phone line with a fixed rental and capped install fee? What kind of utility fees (power, etc) are incurred through providing these services? And so on. In short, what costs haven't been included in the article?

To me it seems similar to looking at a $70,000 car, and calling it a rip off because you're offered a $200 discount for a $150 tire. The rural network is part of a much bigger beast - its not a stand alone piece of infrastructure. Telecom spent $833 million on capital expenditure in the 06/07 financial year, and just over $700 million on cost of labour - so a newpaper journalist would like me to believe that less than 1.4% of the 1.5 billion total was spent on rural services?

So I'm not persuaded (certainly not by the Herald) that the quoted figure is the entire cost for rural services. Nor am I inclined to believe anyone in Telecom is about to retire because the industry subsidy is $3 million bigger than one line item for rural services. It looks like old style journalism to me. Here's a capex figure, here's the industry subsidy, put the two together and yell "thief" at the top of your lungs. Must have been a slow news day.

BTW, this is not a criticism of your blog or raising the issue within the forum. As said - good on ya for having an opinion and for raising a thought provoking issue.

sbiddle

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Reply # 100062 15-Dec-2007 06:57

I don't believe Telecom are doing anything wrong. At the end of the day the TSO forces Telecom to supply a phone service to all customers at a maximum price that can only be increased inline with yearly inflation. This forces Telecom to cross subsidise rural customers who cost a lot more to provide a service to than it does to provide a service to a metropolitan customer and is simply unfair.

The sooner rural customers pay a value that reflects the cost of providing their service, the better off we'll all be. In any other industry the commerce commission hates cross subsidies and even argues that they are immoral and in some cases breach anti competition laws and yet Telecom is forced into them by a Kiwi Share and later updates TSO agreement that force them to do this. The KS/TSO is approaching 20 years old and is well past it's use by date, the sooner it's gone the better. Since it doesn't cover NGN services it doesn't have long to go.

VFNZPaulBrislen

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Reply # 100068 15-Dec-2007 09:16

The problem is that for every dollar we give Telecom to invest/not invest in rural New Zealand, that's a dollar we can't invest ourselves. Over the five year course of the TSO we will have paid Telecom around $100m - that's enough for 400 cellsites or an additional third of our network build. That's quite some outcome if we were "forced" to do that instead of giving the money to Telecom. Instead, the cash has gone into maintaining the TSO which for some reason costs more and more each year. We're only talking about 50,000 to 60,000 people defined as being "commercially non-viable customers" (CNVCs) but the cost of providing service keeps going up.

Incidentally, the service we're talking about isn't broadband - it's 14.4kbit/s for 95% of NZ and 9.9kbit/s for the next four percent (the remaining few aren't required to be covered by the TSO but will get access to satellite). That's kilobits, not megabits, making it a very expensive way of providing 2G cellphone capability.

The good news is that the government has started a review of the TSO that should lead to some major changes. I'd hope for contestability, for one thing... that is, all the telcos can compete to offer service to these CNVCs. As we figure we already cover around 70% of them, we'll be in. That begs the question, are they really commercially non-viable if there's more than one network offering them service.

Jon Hoyle in the Dominion Post wrote a nice piece about TSO but sadly it's hidden behind Stuff's amazing archive system. Juha, if you're watching, how about flipping a switch up at Fairfax HQ to make it visible again? eh?

Cheers

Paul

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VFNZPaulBrislen

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Reply # 100071 15-Dec-2007 09:51

cokemaster: Do you have a source on this? Details? Or is this another 'Chinese whisper'?

Hi CM, to answer your question, David Cunliffe produced those figures and you can read the whole speech here, but here's the bit you're asking about.

Rural Telecommunications Services

Currently only ~54% of Telecom’s 231,000 rural telephone lines are capable of offering broadband services to users, although there are significant regional disparities across the country.

For a significant period of time it is our view that there has been considerable underinvestment in the rural telecommunications network, for example:

It is estimated that Telecom has invested $22 million annually on the rural fixed network over the past 13 years, covering both growth and replacement investment.
By contrast, Telecom’s annual rural depreciation is estimated to be $50-$70 million, with the age of the rural network suggesting that an ongoing replacement programme should now have been put in place. It is estimated that Telecom currently receives around $25 million per annum in subsidies from the rest of the telecommunications industry for meeting its obligations to provide a fixed telephone service to commercially non-viable customers under the Telecommunications Service Obligations (TSO). It is fair to say Telecom’s average net new investment on rural lines in the recent past has therefore effectively been negligible.

Cheers

Paul

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grant_k

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Reply # 100075 15-Dec-2007 10:16

PaulBrislen: ...It is fair to say Telecom’s average net new investment on rural lines in the recent past has therefore effectively been negligible.

I know many people in rural areas, a lot of whom cannot even get decent dial-up that doesn't disconnect every few minutes. There is absolutely no doubt that Telecom is just doing the bare minimum to patch up the creaking 20th century infrastructure which it inherited from the Post Office.

In saying that, I don't necessarily blame Telecom, because I think the TSO is hopelessly outdated in this day and age.

Let's face it -- $25 million per year is a drop in the bucket for the Telco industry, so why doesn't the government just put its hand into Michael Cullen's deep pocket and stump up the $25 mill which is then put into a pool as contestable funding for those providers such as Vodafone who would really like to have a crack at servicing these rural customers in a cost-effective and pro-active manner. Maybe Telecom would throw it's hat into the ring as well because their EV-DO network is well-placed to provide a voice and data service to far-flung rural customers at 1X speeds of around 120kbps vs Vodafone's GRPS at only 40kbps or so.

There are now much better ways to address this issue than via the TSO. If the government still insists that the Telco industry should foot the bill for philosophical reasons, then how about this:

Levy ALL telcos including Telecom according to their market share and put the money into a pool of contestable funding. That way, at least everyone would pay their fair share and the money would ACTUALLY be used for the purpose for which it is intended, unlike the current system, where other industry players effectively pay for upkeep of the rural network ($25m) and Telecom gets to hang onto whatever their contribution should be.

KiwiOverseas66

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Reply # 100154 15-Dec-2007 19:11

Great comments guys (Paul, Grant K). So from what your saying it sounds like alot of fault lies with the TSO? Probably unsurprising I guess in that the TSO tries to achieve through legislation something that could not be maintained via pure commercial means (otherwise why would you need the legislation in the first place) - and as always there are unforeseen consequences like forcing other players to hand over money they could invest themselves.

I'm not confident that any govt would be successful at removing the TSO however. Free local calling is a bit like buzzy bee, Phar lap, and pavlova - its a kiwi institution. Doesn't matter how much better off the population might be - the TSO has become a political icon whose success is not measured in either technical or commercial terms.

Cunliffees speech raises some interesting issues - but I would treat the estimates as just that - estimates (and for me personally - an estimate from a govt department doesn't really qualify as a source - would you base a business on it)? Some policy official or professional consultant has sat down with a bunch of annual reports and tried to separate out how much Telecom spends on the rural network alone (not including opex, maintenance, costs of core network services, etc). Also as mentioned previously - the rural network is part of a larger infrastructure so there will be costs/ service common across the whole network and not separated out.

BTW - when the minister talks about a "replacement programme" - replace it with what? Fibre?

TinyTim

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Reply # 100376 17-Dec-2007 09:46

Sure there is more to providing rural services than just the access network, but it's the access network that is the context of Cunliffe's speech. The TSO doesn't cover any parts of the network that makes a profit to Telecom (like the core network).

sbiddle, grant_k et al - you must be aware of the TSO review. The review is looking at whether the TSO should continue to exist or not, and if it does, how should it be updated for NGN, should it be contestable, should it include broadband etc.

hellonearthisman - you can't compare the $25 million with the $22 million because the $25 million is for non-profitable areas only and is based in a net annualised cost (depreciation + opex and less revenue), and the $22 million is a capex for the whole rural access network. Though all up it probably makes the comparison worse.