Battling bandwidth blues
There’s not much point having a Ferrari when you can only drive it down a country lane. The rest of the Internet is clogged up. Multicast movies and video-on-demand services which deliver content to the users hard drive will generate the interest. Nick Wood, director of Ihug, discussing future possibilities in 1999.
At the end of the 1990s it was apparent that New Zealand’s pioneering pole position at the forefront of telecommunications deregulation was no longer something we could safely trumpet to the world. All the hype about the information superhighway bringing interactive services, endless information, and eleventy-one video channels to our homes appeared little more than a marketing myth. As the dust began to settle the harsh truth was being realised: most of us only had a dirt road for an on-ramp.
Telecom and Clear had made significant upgrades to their fibre-optic networks across both islands, with rings around the central business districts capable of gigabit per second throughput. However the race to provide competitive high-speed data services into residential communities was an idea whose time had not yet come.
To make a dent in New Zealand’s deregulated market, competitors needed deep enough pockets to conduct ongoing legal battles and cover exorbitant interconnection costs while building their own infrastructure. Complaints about quality of service, obstacles to access, and the snail’s pace journey to broadband had curbed our game. With a growing number of competitors in the ISP market, the focus was on survival and trying to grow and add customer value on increasingly tight margins.
The infighting continued between carriers over outstanding interconnection, billing, and numbering deals. Telecom was still complaining that its network was being overloaded with Internet traffic, while doing its best to keep competitors at bay and to delay the inevitable arrival of faster services, at least until it had the market edge. Instead of being applauded as the fine example of a deregulated market, New Zealand had become something of a laughing stock.
‘The Knowledge Economy’ report delivered to IT Minister Maurice Williamson from his own Information Technology Advisory Group (ITAG) in August 1999 claimed New Zealand was an example of how a developed country had failed to make the transition to a knowledge-based economy. “We will end up an amusement park for the rest of the world on what not to do,” said report co-author Professor Howard Frederick of Victoria University. The government must have a role in steering the country away from a commodity-based exporter to embracing e-commerce, he said. Instead of becoming a telecommunications centre of excellence, the benefits beyond cheaper toll calls had not been realised by the heartland of the economy, small to medium businesses.
Australian researcher Paul Budde agreed New Zealand had to lift its game or risk missing out on the economic benefits of the brave new digital world. There had been more changes in 1999 in the newly deregulated European countries, where former Telecom investors Ameritech and Bell Atlantic were now concentrating, than in New Zealand during the past decade. However, he said there were still plenty of opportunities for private data and voice networks to open up fast communications using local access technologies, which were plummeting in price.
Unlike Germany, Italy, and other locations in Europe, Asia, and the United States, where deregulation was now taking place, few alternative networks had emerged here. Budde said independent networks being built by Wellington’s Saturn Communications and Superway on Auckland’s North Shore were happening too slowly. “In Australia there are 12 companies building local loop infrastructures and inter-city lines providing physical competition. In New Zealand everyone still has to interconnect through Telecom.” It was now possible to build a nationwide digital wireless network for an investment of $300 million.
“Even six months ago that was unbelievable.” Around the world independent providers with strong commercial backing were creating local phone companies with the support of governments who offered protection from monopoly players with the full support of the banking community.
Speed bumps
Internet use among New Zealanders remained the highest per capita in the world, revealing our determination to make something of this empowering technology. However there was ongoing frustration at data access speeds, and the high cost of dedicated lines or fast access technologies, which prevented the use of audio and video, now commonplace on the Internet.
There was a major opportunity for competitors to bid for spectrum from the Ministry of Commerce auction and for Internet providers to develop their own local networks.
However Budde, author of the tenth ‘Telecommunications in New Zealand’ report, said some options to build local loop networks relied largely on unproven technology. Earlier in 1998 Formus International paid $2.4 million and Clear Communications $800,000 for high-speed frequencies to be used for local metropolitan distribution services (LMDS). The technology had not been commercially successful anywhere. “It’s too complex. If they can’t get it going in the United States with all the capital that’s available there, then New Zealand is unlikely to outshine them within the next 6–12 months.”
Satellite services were another option but still “very much one-way technology,” said the report.
Budde predicted tough times ahead as telecommunications service providers realised they could no longer compete on price alone. There would be mergers and partnerships with ISPs and some players leaving the market altogether. The incentive, according to Budde, was research that showed people would happily double their spending on telecommunications if they could access video-on-demand, interactive digital TV, fast Internet, and other such services. At the end of 1998, he said, people typically spent around $70–$80 a month on telecommunications, and predicted that over the next five to ten years that would grow to $150–$200 a month as lifestyles changed. All this depended entirely on having the right infrastructure in place to deliver these services.[1]
In 1988 more attempts to create an information superhighway were abandoned than completed, with several regional cable and pay TV operations failing and Telecom shutting down its First Media cable TV operation. Apart from Sky TV, Saturn Communications was the only important player, but it was not rolling out fast enough to make a difference.
Before committing beyond modem speeds, users wanted guarantees of bountiful bandwidth for their buck. At this point in New Zealand’s Internet history, any suggestion of moving up to a 2Mb leased line would immediately hit the spreadsheet mentality. Leased lines were still mainly limited to 64 or 128kbit/sec or the use of ISDN. From Telecom, Clear, and other ISPS, that would still set you back a minimum of $200 a month, plus per-minute costs at traditional business rates. Leased lines sold by Telecom and Clear were about $300–$400 a month. Genuine fast Internet access was still some way off, although Saturn had established an inspiring model in Wellington, bringing TV and telecommunications services to cable subscribers. Satellite-based bandwidth from Ihug also showed promise.
When Telecom pulled the plug on its First Media HFC project it claimed it had found a less expensive technology in DSL technology, which would use the copper cable for data and delivery of movies. It soon became evident that the copper infrastructure was far from suitable for pay TV, so the newly branded JetStream service, when it was eventually released for public consumption, would be for fast Internet only.
When DSL failed to appear on the commercial horizon in a timely fashion, attention began to turn back to that other copper wire enhancement technology, ISDN. The advent of the 56kbit/sec modem had provided some competition, but ISDN was a fully digital service that worked over copper wire and fibre with full two-way transmission, unlike the DSL family of technologies, which had a narrower return path. Despite having major problems with its network when ISPs began using primary rate ISDN to help them connect their growing number of customers, it was now pushing basic rate ISDN to small businesses.
Telecom had failed horribly to get the price or business case right previously and was now actively pitching basic rate ISDN (2 x 64kbit/sec plus 16kbit/sec signalling channel) as ideal for telecommuters to connect back to the main office, for high-speed Internet access and moving larger files such as graphics. There had been several price reductions but these still created a huge obstacle to uptake and paled in comparison to other countries where ISDN was priced closer to normal phone services. Clear began delivering a basic rate service from June 1998, mainly focused on the business market. That gave Telecom further incentive to lower its prices. In August it slashed its basic rate ISDN installation costs from $350 to $175 in an effort to boost the popularity of the service.
Can the copper cope?
Meanwhile the old infrastructure issues began appearing again. Even the latest 56k modems were proving sensitive to line conditions. If the copper cable had deteriorated (there was water on the line or subscribers were further than 3km from the nearest exchange) chances were the signal would be significantly impaired. Many of those who had been trialling DSL, allegedly capable of 6Mbit/sec speeds upstream, were at times only experiencing only 1Mb–2Mbit/sec speeds over the telephone lines.
Much of the reduced speed was attributed to the nature of the Internet and its bottlenecks, claimed Telecom, which was spending $35 million upgrading its copper network, mainly in Auckland. If the local loop, the ‘last mile’ of copper into our homes and businesses, wasn’t even up to the challenge of delivering dial-up Internet how was it going to cope with widespread DSL? According to my own investigations into the state of our copper cabling, published in Auckland’s Metro magazine in October 1998, throughput issues could arise because of the age of the copper in the overhead or underground twisted pairs, different grades of copper being used, and ‘bridge taps’ where copper was doubled back down the street.
While the universities were now out of the game of providing Internet backbone services and were now using commercial offerings from the main carriers or ISPs for their networking needs, former Internet gateway manager John Houlker at Waikato University was still taking an interest in market developments. He was both impressed and concerned at Telecom’s plans to deliver DSL nationwide. “I don’t see how you can have an open and competitive environment when a fully integrated top-to-bottom communications company has the whole system plus the numbering plan. It was never going to be easy but having multiple companies laying several different cabling systems in each main centre is a huge ask for a country of our size. How on earth are we going to get lower cost communications,” he wondered.
“In my view they should never have sold Telecom bundled the way it was. They’re even doing it with the power sector too late. They should have made the division between the lines and the services before the local power companies were sold up from community trusts and local authorities. The Telecom lines should have been sold as a separate thing.” He hoped high-end existing wireless frequencies owned by Formus Communications and Clear Communications and the forthcoming spectrum auction of at least 2000 regional frequencies, would give competing carriers an opportunity to bypass the local loop. “It could be the big hope for some real competition,” said Houlker.[2]
Telecom weaves new web
On the surface at least Telecom seemed to be having something of a change of heart. Instead of sidelining ISPs and doing its best to squash them underfoot – and many ISPs certainly claim to have felt the underside of its corporate boot – it appeared to be taking a more service-oriented approach. After all, ISPs were mostly Telecom customers, and their demands for higher level services and more bandwidth translated to a highly profitable revenue stream. And with new, faster services coming on stream, perhaps it was better to have a friendlier captive market than a renegade one that would look for alternatives at any cost.
Graeme Rowe, Telecom’s marketing manager for computer communications, was given the unenviable task of turning the situation around. “All those ISP guys had the year before been in garages with ten telephone lines so the basics weren’t even there. We were copping a lot of flak in the press. Most of it was relationship-driven, and most of it was driven by the aggressive attitude – or the high-growth strategies that ISG (Internet Services Group aka Xtra) was preparing at the time. We didn’t have the right relationships with the ISPs, we weren’t supporting them technically, we didn’t have the right sort of infrastructure, there were credit management issues galore … so we had to change to adapt to the situation.”
Telecom’s goal was to introduce high-performing networks with high percentages of customers connected and to reduce the geographic barriers to connecting. “We set up structures and processes to deal with the ISPs as true and valued customers in their own right – whereas before we’d treated them as a few of the thousands of small businesses. We moved them into the corporate business where we got the technical resources to help them.”[3]
Demands from businesses and Internet providers were coming thick and fast, along with complaints about price and poor service. But Rowe’s comments seemed to be a veiled apology for the heavy-handed approach of the past, suggesting a more conciliatory approach was dawning. In late 1998 Telecom introduced IPNet, specifically built for the transport of Internet traffic and designed to relieve the growing pressure on the public telephone network. The new network overlay would deliver ISP traffic over a more Internet-friendly platform.
IPNet, initially trialled exclusively by Xtra for two months, meant no more toll calls. Rather than points of presence in each location to log on or toll calls to get service, ISPs who subscribed could now get their customers to call a single 0800 number for nationwide access. “IP is the network now. The platform itself has potential to do all sorts of things – it’s going to be dial-up, ISDN, ADSL, VDSL, HDSL, wireless, satellites, paper cups and string if it works. That’s what IP is going to be – not any one thing. I can honestly say most of our objectives have been met. We have the best Internet in the world. The network of any ISP here is significantly better than any you’ll get in the USA. We have higher penetration and getting busy tones on dial-ups is rare,” Rowe told journalist Russell Brown.[4]
IPNet was essentially ‘managed modem banks,’ directing traffic straight from the closest exchange to the ISP concerned, providing nationwide free calling. In her thesis paper ‘Strategic Behaviour of Internet Service Providers’ (2000), Christina Enright looked into the initial impact:
Said the spider to the fly
During the first half of 1999 a series of events changed the whole nature of competition among ISPs and gave Telecom the opportunity to assert a new level of control over the market. First was a move to flat-rate pricing, which triggered another round of price wars.
Typically New Zealand Internet access had been time-based – you pay for what you use – but a hybrid charging regime had evolved, offering limited megabytes for a monthly fee. Ihug (with an estimated 80,000 users) had been offering a $45 flat monthly fee for four years, with 60 percent of its customers using that option. In February 1999 in response to growing competition from Xtra and ClearNet, it doubled on-line time for its $30 Sapphire account holders, who could now stay on-line for 60 hours. Earlier Xtra had launched its Advance 20 and Advance 50 plans, which slashed the hourly rate to one-third of that offered by ClearNet. ClearNet then announced it would introduce a flat fee service from 8 June and to cope with expected growth in traffic announced a $2 million upgrade including more powerful processors for its front and back end systems, new switching technology, triple the number of modems, and enhanced firewalls and security. One day later Xtra, now with an estimated 180,000 users, came back with a $40 monthly rate and extended its entry-level options to include ten hours for $15 and 20 hours on-line for $25.
Fierce competition between the top ISPs meant a single monthly rate of around $40 for an ‘all-you-can-eat’ Internet access rapidly became the new industry standard. The new flat monthly fees allowed users to stay on-line for as long as they liked without incurring hourly or per megabyte data fees. Xtra general manager Graham Mitchell said an increasing number of people were spending more time on the Internet, and the new pricing meant they wouldn’t have to worry about hourly charges. However he warned the new deal wasn’t meant to encourage permanent connection to the Internet. Tim Wood of Ihug said it was inevitable the major players would move to flat-rate charging but warned their networks would quickly feel the pressure. He said some Ihug users stayed on-line for up to 700 hours a month, and a large number were connected 400 hours a month.[5]
While this huge churn was going on and ISPs were trying to cope with a growing customer base that planned to spend longer on-line, Telecom dealt its trump card. In December 1998 IPNet had clocked up 87 million call minutes and been through a major upgrade after some users found they couldn’t log on. Now, confident of its robustness, Telecom used its monopoly position as ‘owner’ of the local loop to force the entire Internet community to shift across to a new dial-up access network.
It gave ISPs and their customers six weeks to reprogramme their systems to the new ‘overlay’ network. Telecom claimed its public switched network was creaking under the strain of domestic Internet users hogging the lines and gave them until 1 August 1999 to add an 0867 access number to IPNet. Abstainers would face a two-cents-per-minute charge after an initial ten hours on-line per month, and if the network became congested Telecom reserved the right to take those users offline without warning. Business customers would continue to pay $4.55 a minute for IPNet unless they used special services such as ISDN or other data services.
ISPs were outraged, believing they were being blackmailed into accepting the new regime, which they perceived as a commercial tactic, particularly when they were smack in the middle of a price war over flat-rate accounts. The 0867 deal also bypassed existing interconnection deals, depriving rival carriers of termination fees from Telecom. About 20 ISPs met in Wellington to consider legal action to extend the timeframe for compliance and won the backing of TUANZ.[6] Xtra customers weren’t too worried: they’d already been on IPNet for months. Right in the midst of the chaos Xtra launched a major advertising campaign promoting its new flat-rate $40 access account. It signed up 9000 customers in the first week, confident it could exceed 200,000 users by the end of 1999.[7]
Ihug director Tim Wood estimated the shift to the new number would cost about $50,000 to contact his customers, revise letterheads, and send out new CDs so users could reprogramme. Jack Matthews, chief executive of Saturn Communications in Wellington, wasn’t impressed either: “It is a blatant, transparent attempt to avoid paying interconnection when it suits them.” Telstra and WorldxChange said the move had made them reconsider expanding their Internet services. Telecom insisted the move was solely to enable it to better manage Internet traffic, which was growing at such an exponential rate it was placing its voice network at risk. It claimed about 60 percent of all traffic on its network was now coming from the Internet.
Internet overload
Xtra seemed blissfully unaffected by the turmoil and stood to pick up significant business as service providers struggled to upgrade to new access numbers imposed on the industry. TUANZ chief executive Ernie Newman was concerned Telecom was taking advantage of the situation while “the management of every other ISP in the country is going through a major restructuring.”
Telecom had been talking about trying to reduce the load on its public switch network since 1998. It had also regularly spoken about the need to upgrade or replace its NEC digital switches at exchanges across the country to cope with the high demand from ISPs. The upgrades never went ahead, even though Internet traffic in mid-1999 accounted for more than 23 percent of residential local calls, up from 13.7 percent a year previously. It claimed the average length of an Internet call was now 22 minutes, compared to three minutes for an average voice call. The top one percent of Internet users were clocking up more than 400 hours of use a month. In March 1999, 23.2 percent of residential local phone traffic was Internet based, up from 16.7 percent in April 1998. By 2002 it was anticipated the Internet would account for 35–40 percent of residential local phone traffic.[8]
Ernie Newman called on the government to urgently investigate Telecom’s claim that it was running out of capacity. “Until now most people have assumed that Telecom, like other telecommunications companies worldwide, was progressively upgrading its network to deal with this.” Telecom needed to explain why it wasn’t prepared for Internet growth if the true reason was in fact network overload. “If however the move is commercially driven, that could be construed as a use of its dominant position in the local loop to drive a major industry change. This can only be to Telecom’s commercial advantage, which raises serious questions about the use of that position, the adequacy of regulations and the role of government in ensuring independent ISPs and users are given a fair go.”
In June 1999 Telecom had, under cover of the 0867 confusion, finally let its fast Internet service out of the bag. Its pricing and performance proved disappointing to many business and domestic users who were hanging out for a faster and more affordable on-ramp to the Internet. DSL, which allowed customers to simultaneously surf the Internet and talk on the telephone or send a fax, had been continually tested since January 1997. It now used Telecom’s IPNet and users could stay on-line all the time without incurring time-based charges. But what if our aging copper telephone lines weren’t able to sustain high data throughput? Well rural areas were definitely going to be a problem because any customer more than 3–5km distant from the exchange was going to get weaker signal. Based on its trial Telecom had reached a compromise decision to go with a ‘rate adaptive’ version of DSL, which would detect the condition of the telephone lines. It was capable of 7Mbit/sec into the home, but likely to prove a lot slower over most New Zealand lines.[9]
Xtra domestic customers using JetStream would pay a $299 installation fee (or buy a Nokia modem for $450) and an entry-level price of $69 per month plus modem rental ($119) for their speedy link into cyberspace. The service, however, charged 35 cents per megabit after the first 600Mb of downloading per month. Business charges were a lot higher. Telecom had upgraded more than 30 exchanges in Auckland, Wellington, Christchurch, Palmerston North, and Hamilton and planned a progressive nationwide roll-out. JetStream would operate to the maximum capabilities of the copper local loop network, estimated at 6Mbit/sec downstream and around 1Mbit/sec return path.[10]
Curiously Telecom had been beaten to the gun when a rival company launched its own version of DSL technology. Hamilton-based Lloyd Group delivered its commercial offering in December 1998. Telecom was miffed but allowed the service, warning, however, that there were no guarantees of quality and that it may have to drop the service if there was any interference on the line. Within a couple of months, just before Telecom’s commercial launch, the entrepreneurial company was asked to desist and put its plans for a national network on hold. Telecom spokesman Glen Sowry said the service Lloyd Group was offering was “outside the specification of the circuit” designed to run at up to 3.4kHz. Telecom alleged Lloyd’s equipment was running up to 90kHz and more and was “dramatically outside the band and risks interference with other services.” Lloyd Group executive director Daniel Lee said Telecom had restricted his access to certain circuits, largely because it didn’t want competitors in the DSL market. “We believe access to copper should be open to other competitors rather than them having to use Telecom’s IPNet.”[11]
Lloyd Group had been offering its DSL variation to businesses at industrial parks in Auckland and Hamilton and claimed to have entered technology and financial partnerships to extend the service across the country. It wanted to provide alternatives to digital leased lines at guaranteed 128 and 256kbit/sec speeds for a flat fee. Lloyd Group commissioned technical studies to prove its Hotwire DSL or MVL (multiple virtual lines) technology from Paradyne, created no interference on the network. It alleged Telecom’s own ISDN and xDSL technology created far more electrical interference. The case alleging anti-competitive behaviour was taken to the Commerce Commission, which was still dealing with complaints about Telecom’s last minute network switch that was forcing Internet users and service providers to change their access numbers or face per-minute charging.[12]
While other ISPs were in discussion with Telecom about reselling the service, the only other fast Internet broadband service was Ihug’s satellite and wireless offerings. Its StarNet service (400kbit/sec–2Mbit/sec), previously restricted to those within line of sight of Auckland’s Sky Tower, was now available from Ihug’s 14 points of presence around the country for $59 a month for 60 hours on-line and $69 for unlimited access. Customers also needed to buy $300 satellite-receiving equipment.
Telecom’s ‘broadband’ launch provoked Ihug to revisit its pricing structure and get tough on its own Internet hoggers. The ISP put a data cap on high-use accounts, mass mailing its 1000 fast Internet users to advise them that from August they faced a limit of 60Mb a day download or 2Gb a month, and after that they’d be charged 10 cents per megabyte of traffic. The move was clearly aimed at about 20 heavy users who were downloading 1–3Gb a day. Irate user Wayne Moroney said he could easily download 69Mb in a couple of hours, often to get the latest game demos or the latest Linux RedHat operating system, which was itself about 400Mb. “They’ve done an about face and there’s a lot of angry people out there,” he said. The only option for big data movers was a business account at $168 a month.[13]
Catalyst for intervention
The IPNet-0867 debacle was far from over. The Commerce Commission complaint had become the catalyst to help shift the government from hands-off mode to taking a serious look at the existing deregulation model. The deadline for compliance with the 0867 switch-over had now moved to September 1999 but even some of those who had moved across were still facing difficulties. North Shore-based ISP Web Internet claimed issues with Telecom’s 0867 had prevented it from a nationwide roll-out. Since moving to the service the company said its clients had experienced almost daily disruption, often resulting in its whole network crashing because Telecom had concentrated all its customers on one exchange.
The Labour-Alliance Government believed the 0867 mandate of a two-cents-a-minute penalty for non-confirming Internet users might be a breach of the Kiwi Share, which promised New Zealanders that local access to telephone services would remain free, and the cost of phone rentals would not rise faster than the cost of living. The deal was struck when Telecom was first sold off to US telecommunications giants Ameritech and Bell Atlantic. Commerce and Communications Minister Paul Swain said the 0867 issue needed to be tackled with urgency. Labour also promised a major review of the telecommunications market and the Commerce Act, which was supposed to cover competition issues. A cheeky claim from Clear that Telecom should be forced to split up its local network for use by competitors, in much the same way as Telstra had been asked to do in Australia, also needed sorting. Clear claimed Telecom was using its monopoly on the lines to limit competition.[14]
Under the original interconnection arrangement Clear, Telstra, and other carriers paid each other to terminate calls but under 0867 everything now went through Telecom. Clear refused to conform and mounted its own legal battle against Telecom while accumulating a huge potential bill at 2 cents a minute for every dial-in user. In the meantime it continued to claim 2 cents a minute for calls received from the Telecom network – something its rival was obviously unhappy about.
Further complications arose in April 2000 with the arrival of free Internet provider i4free, a customer of Clear. Telecom disconnected the newcomer on the first day of service. The upstart provider had common directorship across a group of existing telecommunications companies but was depending on payment from Clear for calls terminated on its network to survive. Telecom insisted i4free was illegally bypassing its 0867 Internet access number and causing major overload problems at its main exchange in Airedale Street, Auckland.
Even though i4free changed its dial-in numbers, Telecom just as quickly disconnected them. When it became obvious i4free was facing difficulties, another Telecom competitor, WorldxChange, which planned to launch its own service, came to the rescue by offering dial-in numbers. Telecom cut those off too but immediately reconnected when it realised its mistake. Then the High Court stepped in. A mandatory injunction was served at the request of i4free, requiring Telecom to reconnect the numbers and restraining it from further disconnections until the matter could be sorted out legally.
However Telecom, believing it had sufficient grounds to challenge the decision, moved once more to disconnect, claiming the i4free service was putting its network at risk. A further urgent sitting before Justice Judith Potter reaffirmed the court decision ordering Telecom to leave the newcomer alone. In a weekend conference call Justice Potter extended the injunction, warning Telecom could not single out i4free or any other ISP, even if there was network overloading. Any restriction should be applied equally across 15 ISPs using its central Auckland exchange, including Telecom’s own Xtra service, which now had 250,000 customers.
Justice Potter said she found it difficult to accept that Telecom did not have “the wit or the resources” to manage the situation at least until the matter came before the court for a full hearing. Queen’s Counsel Jim Farmer, representing i4free, insisted Telecom’s claims of the imminent collapse of its network “defied any sense of credibility” as his client was only handling about 500 simultaneous calls compared to about 8000 for competitors such as Ihug. The dispute further emphasised the two industry allegations that Telecom had failed to invest sufficiently in its domestic network to prepare for the growth in Internet traffic, and the two-cents-a-minute penalty on domestic dial-in customers who didn’t use Telecom’s new 0867 prefix was a breach of the Kiwi Share.
Industry gangs up
Initially i4free had circumvented the new numbering scheme by redirecting all traffic through the Clear network, claiming there was nothing in its agreement with Telecom prohibiting this. It said any attempt to prevent the service going ahead would be a breach of the anti-competitive clauses of the Commerce Act. Clear joined i4free in its battle against Telecom and offered to support the newcomer if it ran into financial difficulties and to help battle any counterclaims arising from the court case.
The free Internet provider was backed by directors of National Mail, Attica Communications, and CallPlus, including Malcolm Dick, an experienced telecommunications pioneer and one-time senior Telecom executive and his partner, i4free chief executive Annette Presley. The couple claimed the business could pay its way through advertising revenue and commissions for on-line sales. It hoped to achieve 100,000 customers by Christmas 2000. Initially Telecom won itself some unlikely supporters in its wish to crush the free opposition. Ihug moved to block its 65,000 local customers from accessing the i4free site, claiming it was ‘an aberration’ and the service encouraged users to leech off the back of existing players for email. Within days Ihug removed its block after users threatened to lay a complaint with the ISOC for breach of conduct.[15]
Through all this the Commerce Commission continued its preliminary inquiry to determine if Telecom might be in breach of the Commerce Act, with three official complaints having been made about the unilateral move forcing ISPs to change their access number. It admitted the issue was a complex one, but became convinced Telecom had breached section 36 of the Commerce Act, relating to the use of a dominant position in the market to exclude competitors. It took Telecom to court where it faced potential fines of up to $5 million if found guilty.
Telecom claimed the new dial-in numbers were outside the traditional interconnection agreements signed with rival carriers including Clear. Clear alleged the move automatically wiped out an estimated $25 million in interconnection revenue but struck an out-of-court settlement with Telecom in June 2000 and agreed to use the new number.[16] Telecom also reached an agreement with Telstra Saturn over 0867 access, which it claimed had helped correct any distortions caused by the dramatic growth in Internet traffic. Meanwhile the High Court had ruled that Telecom must allow free Internet access to domestic users as part of its Kiwi Share obligations.[17]
Telecom, however, wasn’t going to take the Commerce Commission’s decision to take the matter to court lightly, claiming it was totally out of step with current developments in the telecommunications market and extremely unhelpful. Industry services manager Greg McAlister said it would only rake up history and undermine the ongoing Telecommunications Inquiry process, which Telecom and other industry players fully supported. “We will vigorously defend any proceedings brought by the Commerce Commission. Telecom has always taken its legal obligations very seriously… It is unsatisfactory to have this kind of enforcement a year after the event. The Commission is very much behind the game.”[18]
Those challenging the 0867 changeover included Ihug. Former director Nick Wood viewed the whole debacle as a set-up by Telecom to get everyone across to its new IPNet. “They had lost control of the market, they got caught with their underpants down by the free ISPs and had to play catch-up. They had to wait until they could deliver DSL to build up their customer base and gain back everything they lost in the dial-up market. They pinned Clear into a corner. Then Clear misled the guys from Slingshot when they created i4free and then basically killed it off with their own i4free service and using tromboning to get around having to pay the 0867 two cents a minute fee.”
Ihug was losing money hand over fist and went to Finance Minister Bill Birch and to the Commerce Commission to try to put an end to the craziness. The only alternative to taking court action itself was to accept an invitation to sit down in a room with Telecom. “We negotiated a way to avoid all this readdressing where people were getting two cents a minute for calls, working out a deal to move across to the new network and cover lost revenue based on a fraction of a cent. It could have been up around $70 million if the cost was based on two cents a minute but we settled for $16 million over three years. Soon after that Telecom dropped its ISP charges significantly. That whole thing nearly brought the whole Internet to its knees, a lot of people lost a lot of money and the industry got really hurt,” said Wood.
Telecom remained convinced it had acted properly and in the best interests of customers but the court case went ahead. It was to have been heard in the High Court in Wellington on 11 September 2000 but continued to be deferred. Ironically the Commerce Commission court case alleging anti-competitive behaviour actually came to trial in the Auckland High Court seven years later in August–September 2007, with former key individuals from Telecom and the ISP community called as witnesses. Some were flown in from the United Kingdom and Australia. The judge reserved his decision.
Another price war
Late in 2000, voices railing against the 0867 move had been silenced, mainly because everyone was now using the number. Clear found an interim solution, agreeing to pay Telecom $35 million in a one-off deal negating any outstanding court cases and 0867 charges and covering projected termination fees for all voice and Internet traffic over the next l2 months.[19]
From August ISP prices were being forced down again from a $40-per-month flat rate to an average $25 flat fee for dial-up, precipitating the second major price war in just over a year. Many providers now had start-up accounts as low as $10 a month and tens of thousands began to take up enticing offers from the newly arrived free providers. Xtra continued to dominate the market, having grown 49 percent in 2000 to over 320,000 subscribers. Xtra now accounted for about 42 percent of the market, well ahead of its closest rivals ClearNet and Ihug. On-line-numbers had reached critical mass, which meant e-commerce was now more viable than ever before. Depending on which survey company or corporate research you believed, somewhere between 35 and 40 percent of New Zealanders, two-thirds of them home users, had Internet access.[20]
Wireless technology was beginning to provide some relief for those seeking fast Internet – mainly businesses – with a number of parties, including Walker Wireless and Clear, offering fixed services. An arrangement between Telecom and Clear in October 2000, which tidied up outstanding interconnection and legal issues, gave Clear access to the local loop with talk of a rival DSL service by March 2001.
It seemed the whole telecommunications market was reviewing, reinvesting, and repositioning; Telstra was looking to extend its presence; its first step was purchasing former Victoria University ISP NetLink. It had acquired a mobile telephone frequency, was providing bandwidth for several ISPs, and was working with Telecom to provide local loop access. In fact by now it was one of Telecom’s biggest customers. It was first tipped early in 1999 that Telstra was keen to take a shareholding in Clear. Clear’s earnings had been in steady decline since 1995. It claimed it had so far spent $400 million on its network and since the British Telecom buy-up, announced it would invest a further $120 million for the 2000 financial year in fibre-optic cabling and extending its LMDS wireless network closer to the nation’s businesses.
Meanwhile Telecom was in the process of becoming an Australasian company, buying 78 percent of AAPT, Australia’s third-largest telco, and by December 2000 had raised its shareholding to 100 percent. AAPT owned all the lLMDS frequencies put up for auction in Australia in 1999. Along with other players, Telecom was keen to get its hands on the five New Zealand-wide frequencies bought by Denver-based Formus Communications at auction for $2.5 million.
Formus had serious intent for the Australian market but wouldn’t extend to the A$60 million paid by AAPT and pulled out of both markets. Speculation was rife that if Telecom clinched a majority shareholding in AAPT and convinced Formus to sell its Kiwi frequencies, it would be in an ideal situation to roll out a high-speed wireless network across the country to complement its DSL service. Waiting in the wings were new-generation cellular services in the 2GHz band, once the government worked out a deal with Maori interests, who were contesting ownership and management rights. Also on the list for future bandwidth provisioning was TVNZ-owned BCL, which had begun hawking a fast Internet offering to various ISPs.
Saturn Communications had stuck to its knitting in Wellington despite being engaged in a head-to-head battle with Telecom overpricing plans specifically targeting its customers. Its cable roll-out had been inhibited by the lack of teeth in the Commerce Act, allowing Telecom to match its prices on a street-by-street basis. Now with $100 million from its parent Austar to expand into Auckland and Christchurch, it was looking like a serious competitor. Saturn invested $240 million in the Wellington roll-out of its network and claimed a penetration of 23 percent of homes within its network coverage. Users paid $93 a month for a full-service network, including pay TV, voice, and fast Internet.
Then at the end of 1999 Australia’s dominant carrier Telstra shocked the market by entering a partnership with Saturn, promising a $1.2 billion spend-up on a nationwide broadband network covering 65 percent of homes and 80 percent of businesses. The renamed TelstraSaturn promised to lay fibre loops in the main business centres, deliver wireless links to outlying regions and leverage independent local and international undersea cable with 120Gbit/sec capacity. At last it looked as though there was a formidable opponent to Telecom and that true competition would finally arrive in New Zealand.
The new carrier, owned equally by Telstra and Saturn’s Australian parent Austar United, was a deal seen by some as payback time for Telecom after it had invested in Telstra’s rival AAPT. TelstraSaturn was cocky to say the least. Saturn chief executive Jack Matthews compared the new company to a Formula 1 race car against Telecom’s Model T. He said customers could expect savings of between 20 and 40 percent over existing pay TV and telephone providers. In Wellington Saturn customers had access to 50 channels including pay-per-view and free-to air as well as fast Internet via cable modem and a full telephone service.
TelstraSaturn was planning to lay undersea cable – 48 fibres, each capable of 2.5Gbit/sec – from Auckland to Wellington, and on to Christchurch, completely bypassing existing backbone networks owned by Telecom and Clear. Fibre would be installed throughout the central business districts of Auckland, Wellington, and Christchurch with residential broadband access offered in Auckland and Christchurch. Trans-Tasman capacity owned by Telstra would be used to link with Australia, with links to the rest of the world provided through Telstra’s new Australia-Japan submarine cable.[21]
The billion-dollar TelstraSaturn commitment was to have been the largest investment in infostructure by any telecommunications competitor since the New Zealand market opened up a decade previously. It came on the eve of a major review of telecommunication by the new Labour-Alliance Government, which appeared determined to break Telecom’s stranglehold on the market.
Sidebars
Footnotes
[1] Keith Newman, ‘Consumers seek new telecoms services,’ NZ Herald, 21 October 1998; ‘NZ must lift its high-tech game,’ NZ Herald, 29 October, 1998
[2] John Houlker interview, 17 July 1998
[3] Russell Brown, ‘Telecom’s Xtra agony,’ Unlimited, December, 1998
[4] Ibid
[5] Keith Newman, ‘Flat fee for Net access is norm,’ NZ Herald, 11 June 1999
[6] Keith Newman, ‘Rerouting the Internet traffic jam,’ Australian Reseller News, 12 July 1999
[7] Ibid
[8] Telecom Press release September 1999
[9] Interview with Carl Penwarden, who was heading the DSL trials in 1998
[10] ‘High-speed Net from Telecom,’ NZ Herald, 29 September 1999
[11] Keith Newman, ‘Internet bandwidth battles begin, TUANZ Topics, July 1999
[12] Keith Newman, ‘Lloyd puts national DSL roll-out on hold,’ NZ Herald, 6 July 1999
[13] Keith Newman, ‘Ihug pulls plug on its network huggers,’ NZ Herald, 6 July 1999
[14] Keith Newman, ‘Access Denied,’ Australian Reseller News, January 2000
[15] Keith Newman, ‘Telecom cries wolf,’ Australian Reseller News, April 2000
[16] ‘Court action on 0867 access,’ NZ Herald, August 2000
[17] A finding borne out by the Ministerial Telecommunications Inquiry handed to the government in October 2000
[18] ‘Court action on 0867 access,’ NZ Herald, 1 August 2000
[19] Paul Budde, ‘Communication Telecommunications and Information Highways Report 2000/2001’
[20] Telecommunications and Information Highways, Paul Budde Communications 2001, principal research for New Zealand ISP section, Keith Newman
[21] Keith Newman, ‘Peddle to the metal for cable venture,’ Australian Reseller News, February 2000