Telecommunications (New Regulatory Framework) Amendment Bill

Transcription

1 Telecommunications (New Regulatory Framework) Amendment Bill Submission to Select Committee 2 nd Feb 2018 Telecommunications (New Regulatory Framework) Amendment Bill

2 ABOUT VOCUS 1. Vocus New Zealand is the third largest fixed line operator employing over 800 staff In New Zealand. Our retail operation includes a number of challenger brands - Slingshot, Orcon, Flip, Vocus and 2Talk. We are also an active wholesaler of services including access, voice and broadband over both fibre and copper to a diverse wholesale customer base in both business and consumer markets. 2. Vocus has made significant investments in New Zealand. We are the largest copper unbundler with a presence in over 200 exchanges throughout New Zealand. In addition we operate 4,200km fibre optic network transits between virtually all major towns and cities, and connect directly into all major peering exchanges. 3. Vocus is committed to New Zealand and is one of the few large NZ telecommunications companies to base all its customer service call centres here in New Zealand rather than out-sourcing its customer service overseas. 4. Our customers in New Zealand range from government agencies, integrators, large corporate, SME and residential households. We are committed to New Zealand s fibre future. 5. Vocus Group is one of the fastest growing telecommunications companies in Australasia and a major provider of voice, broadband, domestic & international connectivity and data centres throughout New Zealand and Australia. 6. If you would like any further information about the topics in this submission or have any queries about the submission, please contact: Graham Walmsley General Manager Commercial and Regulatory graham.walmsley@vocus.co.nz Page 1

3 SUMMARY 7. The amendments to the Telecommunications Act are generally viewed by the investment market and retailers as pro Chorus & LFCs. Vocus is concerned that the proposed regulatory regime overall is looking to remove existing restrictions that provided balance to the monopoly power given to Chorus. 8. The current proposal would leave Chorus in the enviable position of being a large scale monopoly provider that has a guaranteed rate of return over the life of its assets, is able to exploit the advantage it has from its monopoly access into an expanding range of commercial access products as well as being able create a full range of fixed line telecommunications services, not just local access & backhaul, that use their monopoly access service. Chorus will be effectively retailing in all but name. 9. The Bill covers a wide range of issues on which we have submitted in the past, in this submission we have chosen to focus on the following: - (a) Anchor products Vocus disagrees with the approach of only regulating entry level services and leaving the most commonly used services as commercial services which LFC s can determine price and non-price terms as they see fit. Telecommunications is a rapidly changing industry whereby global innovation have resulted in significant improvements in the capability of networks at little or no cost to network operators. However history shows us that the behaviour of monopoly network operators is to be slow to adopt the new technology or place artificial constraints on services whilst they look to take a monopoly premium. The result is that the majority of kiwis were delayed for years from benefiting from the network capability that was available. We have outlined examples from the development of ADSL and VDSL in New Zealand which illustrate this. New Zealand built a fibre to the home (FTTH) network which should be capable of 1G+ services as NGPON technology develops. We should ensure that it realises its full potential. (b) Removal of restrictions on line of business: The combination of regulating only entry level anchor services AND removing restrictions on Chorus lines of business is a particularly toxic cocktail for existing retail competitors. The existing restriction on Chorus retailing was never meant to be as simple as not allowing retail services provided by Chorus to carry the Chorus brand. They were designed to ensure that Chorus could not leverage its monopoly access position into the wider fixed line wholesale market. Hence the restriction on provision of services above layer two (s69r) and the restriction (s69s) against providing end to end services that link two or more end user sites and which do not terminate at a local or regional aggregation point. The intention was clearly that Chorus was able to wholesale services to RSPs which wanted to connect with Chorus and consume Chorus access services, but that Chorus could not expand its market into the fixed line wholesale market whilst it had a monopoly on the fixed line access. Repealing sections 69R and 69S would allow Chorus to leverage its monopoly advantage in Page 2

4 local access, including the ability to price the commercial access price high and the wholesale service (layer 3 and above) low, effectively predatory pricing, in order to capture the currently competitive fixed line wholesale market. The flow on consequences would be: - (i) (ii) Distortion of the retail competitive landscape with retailers who have invested in infrastructure, relying on wholesale as a component, becoming less competitive If Chorus captures the fixed line wholesale market, retailers will be less able to invest in their own equipment to allow them to manage the service features and performance. There would be a flow on consequence of lessening product differentiation (as this occurs above layer 2) and consumer choice. No impact study or consultation has taken place on the removal of these restrictions. The removal has been positioned as simply removing unused or unnecessary regulation. It is hard to understand why there was no regulatory impact assessment made given the importance of the two sections in ensuring that Chorus was not able to abuse its monopoly position in the wholesale market. The restrictions on Chorus are more than just a prohibition on retailing - they are there to ensure that a vibrant wholesale market can thrive, with the attendant benefits to consumers through innovation. (c) Commercial unbundling: Vocus do not believe that a viable commercial unbundling solution will occur unbundling is like garlic to a vampire to a network operator. All that is likely to occur is a delay to unbundling for 4-5 years as we saw with copper. Probably the most compelling reason why unbundling should not be left to a commercial whim is the choice of the type of unbundling. Different forms of unbundling are developing and the implications for the competitive landscape and consumers are very different. The monopoly LFC s incentives mean that their preferred form of unbundling is not necessarily the form of unbundling that is best for completion and the consumer. If this is left too long technology choices made by the LFC s will preclude some forms and we may end up in the ludicrous situation of different regions getting different forms of unbundled services a nightmare for an unbundler. The realistic threat of unbundling is also a key driver for the network operator to make available the latest capability that global technology improvements deliver for little or no cost. No viable unbundling (which is what a commercial offering will be) combined with comments above on only regulating entry level services increases the concerns outlined that monopoly network operators will defer availability or artificially constrain services in order to take a monopoly price premium. The Commission should be tasked with taking a more proactive approach in recommending and regulating a form of unbundling before options are closed out. Page 3

5 10. Vocus has not commented on a number of consumer issues that the Bill is proposing as we have input into and support the submission on the Amendment Bill by the TCF and favour the approach of an industry led approach to address these areas. Page 4

6 SIGNIFICANT SHIFT TO DERGULATING MOST SERVICES - INCREASING THE OPPORTUNITY TO GAME THE SYSTEM 11. The proposal is a significant shift from the last 2 decades where the most commonly used telecommunications services, such as UBA, have had a regulated access service underpinning them. 12. The original paper stated that the regulated anchor product would ensure that the most common residential voice and broadband services are available at reasonable prices on the network. 13. All retail service providers (RSP s) submitted that the most commonly used services should have a regulated price and that the revenue cap alone was insufficient protection. The recommendation proposes to only regulate an entry level anchor product thereby allowing the majority (likely 90 %+) of services to be commercial. The past is often the best indicator of the future and suggests this is unlikely to be in consumers long term best interest. 14. Artificial constraints by monopoly network operators have consistently delayed NZ consumers from accessing the benefits of technology innovation as Vocus outlined in its submission to MBIE on the Review of the Act (March 2017 para 22). Examples in the past suggest that global technology improvements have been slow to be adopted in NZ as a result of the monopoly provider deferring investment or placing artificial constraints on new technology capability in order to extract monopoly price premiums. Examples include: - (a) (b) (c) Telecom launched in June 1999 full speed unconstrained ADSL capable of 8Mbps. There followed a hasty withdrawal in January 2000 for consumers (but retained for business) and replaced the full speed service with a series of artificially constrained services starting with the introduction of a pedestrian 128Kbps plans (a mere 3 x dial-up). It was 6 years before unconstrained ADSL became available again for consumers. VDSL was made available in April 2009 by Chorus, late by international standards, but at a $20 per month premium over ADSL despite little additional actual costs. Consumers have a small range of price elasticity and as RSP s had consistently submitted there was no take up. For almost 4 years VDSL capability languished until Chorus offered a more sensible $5 per month uplift. Once VDSL got underway (at a $5 premium to cover installation) it became the fastest growing broadband service at 20,000 connections per quarter. In much the same manner as Telecom did with ADSL in 2000 Chorus then attempted in 2014 to withdraw the existing unconstrained VDSL service and introduce a more expensive commercial VDSL service - Boost - (at a $10per month premium) as well as constraining the existing ADSL UBA service. As the Commission noted in its issues paper (7 th July 2014) for RSP s that have VDSL connections Chorus is proposing they either move onto Boost VDSL or take regulated UBA over ADSL2+. On 30 th May Chorus gave notice that from 1 December 2014 the VDSL service provided under regulated UBA will be withdrawn, subject to consultation. Page 5

7 In this instance the Commission were able to prevent Chorus constraining the service but under a commercial service no such safeguards apply. 15. The same technology innovation that occurred with copper (ADSL ADSL2 VDSL) providing significantly faster speeds with little or no cost increase is occurring with GPON. 16. NZ invested in a full fibre to the home (FTTH) network that will be capable of providing 1Gb+ per household. Only regulating entry level services risks Kiwis not benefitting from UFB s full potential. 17. An inevitable consequence of a light-handed approach, only regulating entry level anchor services, is that there is an increased scope for Chorus and LFCs gaming the situation to the detriment of consumers & competition. Combine the entry level anchor service approach with removal of line of business restrictions and you have a high probability of significant reductions in competition in the fixed line wholesale market with flow on distortions in the retail market. REMOVAL OF LINE OF BUSINESS RESTRICTIONS WILL HAVE A DETRIMENTAL EFFECT ON THE FIXED LINE WHOLESALE MARKET AND DISTORT THE RETAIL MARKET 18. Vocus has serious concerns about the proposed removal of restrictions placed on Chorus which would allow Chorus to move from a fixed line local access monopoly provider to a full fixed line telecommunications service provider retailing in all but name. 19. Given that such a major change was buried in the detail with no market impact assessment undertaken, no consultation or discussion Vocus are concerned that the implications are not understood and would have serious concerns if these changes proceeded with no impact assessment on adjacent markets such as the fixed line wholesale market. 20. Para 90 of the Cabinet Paper proposes to repeal sections including line of business restrictions on Chorus that do not add significantly to the fundamental prohibition on participating in retail (section 69R and section 69S). 21. In creating Local Fibre Companies (LFCs) the government created a natural monopoly for local fibre access. Given the natural monopoly characteristics there were, correctly, restrictions put on Chorus in order that their monopoly advantages could not be used to create competitive distortions in the retail market. 22. The existing restriction recognise that it was never as simple as simply stopping Chorus retailing fixed line services under their brand. Specific restrictions were placed on Chorus not providing fixed line access services above layer 2 (S69R) and Chorus were specifically precluded from selling a service that links 2 or more end-user sites together. These very specific restrictions exist for good reason. They enabled wholesale competition to thrive and prevented chorus from leveraging it monopoly in local access to squeeze competition out in commercial markets. WHOLESALE MARKET FOR FIXED LINE SERVICE WORKS WELL AND IS CRITICAL TO THE RETAIL MARKET Page 6

8 23. The fixed line telecommunications market has a very active wholesale market (in contrast to the mobile market which the Commerce Commission are reviewing currently) which has been fundamental in lowering barriers for market entry and enabling investment by RSP s in equipment to improve the quality and diversity of services. 24. The wholesale market is competitive with multiple RSP s, including Vocus, offering competitively priced wholesale services to other competing RSP s as a core part of their business model. Typically wholesale revenues account for around 15% of the retailer provider s revenue. 25. These wholesale services range from raw components all the way to Telco-in-a-box white label services. Services such as:- Access to raw bandwidth backhaul services domestically and internationally Access to regional & international content caches to improve performance of broadband by bringing content closer to the customer Fully featured voice services that can run over the top of copper and fibre services Full ISP capability including traffic management, peering and interconnection WAN & security services for connecting businesses Full telco-in-a-box wholesale service that can be branded and used by any retailer. White label broadband and phone services including operational support systems for provisioning, billing, customer self-service portals that can be branded etc. WHOLESALE MARKET LOWERS BARRIERS TO ENTRY AND PROMOTES COMPETITION 26. Telecommunications is a scale game. Smaller RSP s do not have the scale to invest in all the components necessary to provide a competitive, high performing service on a national basis. The fixed line wholesale market has worked effectively enabling a whole range of participants in the fixed line telecommunications retail market:- (a) Entrants from other markets Stuff Fibre entered the market by consuming a full white label service, TrustPower, the 5 th largest RSP, rely extensively on the use of wholesale services from other providers. (b) Technology solutions providers who bring together different components for businesses e.g. Integrators such as Dimension Data and Datacom purchase wholesale inputs from RSPs as components of their business solutions for connectivity. (c) Small regional ISP s and small integrators WHOLESALE MARKET CRITICAL TO INVESTMENT BY RSP s 27. So why do larger RSPs, such as Vocus, offer competitively priced wholesale services that enable competitors? The answer is that Telecommunications is a scale game and as RSPs grow they need to invest in more capacity and more sophisticated equipment to allow them to better control the quality of their own retail services (purchasing expensive caching technology and deploying Page 7

9 regionally would be a good example). Wholesaling allows them to make that investment earlier, thereby making their product more attractive to consumers and in turn enabling them to grow further. 28. Wholesale revenues typically account for 15% of revenue and that wholesale component can be the make or break on investment decisions from RSP s. 29. Without a competitive wholesale market retailers such as Slingshot & Orcon would not have been able to get on the upward spiral of progressively deploying their own assets and extending their network reach: - thereby reducing their input costs and become more competitive which enabled growth in customers and revenues and these in turn fund investment in further assets which further reduce costs and make them more competitive - fuelling the cycle. 30. Wholesale revenues typically represent 15% of an RSPs total revenue. RSPs operate with an EBITDA in the 2-4% range, clearly wholesale is a critical component of their business. RSP INVESTMENT IS KEY TO SERVICE DIFFERENTIATION AND CONSUMER CHOICE AND SERVING OF NICHE MARKETS 31. It is RSPs investments that enable them to better control the service quality and features ultimately enabling service differentiation and consumer & business choice not the investment by the LFC s. 32. Once the fibre local access network is built it is the investment by RSPs that will be the primary determinant of the quality of the service. 33. Having a competitive wholesale market with many organisations able to bundle and provide different flavours of services creates service differentiation. Many of the organisations, particularly in the business market, may specialise in certain niches or market verticals. Catering for different niches is something that large organisations such as Chorus are typically unable to do. CHORUS CAPTURING THE FIXED LINE WHOLESALE MARKET WILL CREATE DISTORTIONS IN THE RETAIL FIXED LINE COMPETITIVE LANDSCAPE. 34. Chorus with their scale and monopoly on the last mile could leverage their monopoly position and seriously impact the fixed line wholesale market with Chorus ultimately capturing the market. 35. Chorus has a natural monopoly advantage in the fixed line access market:- Page 8

10 Everyone has to ultimately deal with Chorus Their points of interconnect require that customers locate equipment in their data centre. Once equipment is there Chorus have a natural advantage if they are selling other services. Their monopoly of local access means that they have a scale which few can achieve If allowed to they can predatory price competitors out of the wholesale market 36. In fact the decision to only regulate the price of an entry level fibre access service and allow 90%+ of local access services to be commercial leaves it widen open for Chorus to exploit their monopoly advantage and dominate the fixed line wholesale market, through cross-subsidisation and predatory pricing, with flow on impacts to retail markets. ONLY REGULATING ENTRY LEVEL ANCHOR PRODUCT AND REMOVING LINE OF BUSINESS RESTRICTIONS IS A TOXIC COCKTAIL FOR RETAILERS. 37. The fixed line wholesale market is for services that layer on top of Chorus local access product, so in nearly all cases wholesale and access are bundled. However if the price of the commonly used Chorus local access is not regulated (as will be the case if only an entry level service is regulated) then Chorus are able to take monopoly margin on the commercial access product and cross subsidise the wholesale service that sits on top of it (layer 3 and above) effectively squeezing any wholesale margin and cutting out existing wholesale providers from supplying wholesale services to retail RSP s and supplying WAN and other business services to IT integrators in the business market. 38. To reiterate wholesale revenues typically represent 15% of an RSP s total revenue for an RSP who may have an EBITDA in the 2-4% range. If wholesale revenues of the existing retailers are diminished as a result of Chorus market entry there will be flow on consequences for their growth & ability to invest having the effect of reducing the service differentiation that results from multiple wholesale providers. 39. The impact is not just the loss of wholesale revenues of existing retailers who have invested in layer 3 and above infrastructure out of the fixed line wholesale market. Chorus through creative pricing of bundles could tilt the retail market in favour their own wholesale customers (those consuming Chorus layer 3+ and above fixed line services) with RSPs who have invested in their own layer 3+ infrastructure being unable to compete on large corporate & government deals, small business & consumer retail services. Ultimately these businesses could become sub-scale with stranded assets impacting their ability to compete. NOT LOOKING TO PRECLUDE CHORUS ENTRY TO ADJACENT MARKETS SUCH AS MOBILE 40. Our concerns focus on the fact that Chorus has a fixed line local access monopoly and there is already a vibrant fixed line wholesale market. The line of business constraint should only apply to fixed line communications. Page 9

11 41. The impact on the wholesale mobile telecommunications market for example would be entirely different, firstly that market is not established and functioning in the manner of the fixed line market and Chorus fixed line natural monopoly doesn t offer it the same advantage. 42. In conclusion the restrictions in sections 69R and 69S should remain although it could be clarified that these only apply to fixed line telecommunications services. UNBUNDLING FIBRE: THE OPTIMAL FORM FOR COMPETITION AND CONSUMERS CANT BE LEFT TO RELUCTANT UNBUNDLERS 43. Vocus and other RSP s are of the view that commercial unbundling WILL NOT WORK. 44. As we have submitted there are no incentives for a monopoly network provider to offer viable commercial unbundling unbundling is like Garlic to a vampire to a network operator which is why it is a strong driver of investment & innovation in the network, improved efficiency and better layer 2 & above services. 45. The proposal that the Commission review the situation and have the power to classify a layer 1 anchor product, with cost oriented pricing, is likely to be a long drawn out process over an extended number of years. That does not create sufficient incentive for LFC s to offer viable unbundling in the short term. 46. Probably the most compelling reason for regulating, rather than leaving to a commercial offering, is the decision around what form of unbundling should occur. As MBIE have identified unbundling comes in several forms, physical & wavelength. 47. The type of unbundling chosen could have a profound effect on the level of competition however often the monopoly network operator s incentives and preferred form of unbundling are not aligned with what is best for consumers and competition. The network operator is, in fact, incentivised to architect the network to make unbundling difficult. Furthermore we could have the ludicrous situation of different LFC s offering different types of unbundling. 48. In Vocus view unbundling could have a significant impact on the service New Zealanders receive The Minister needs to ensure that viable unbundling is an option and that the form of the unbundling is in line with the long term benefit of competition and consumers. 49. The arrival of software-defined networking and network function virtualization in the access domain create a new way of sharing infrastructure physical and virtual. Vocus suggest that MBIE task the Commission with studying unbundling developments in 2019 with a view to recommending whether to regulate unbundling and the form of unbundling across the LFC s rather than leaving it to a commercial obligation and the strong possibility of lengthy delays following the failing of an intervention test and a lengthy period to then regulate (it could be 2026 and later) by which time LFC s may have made technology choices that already limit the potential benefits Page 10