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Submission to Telecommunications Inquiry

The Internet Society of New Zealand Inc
Level 1, (e)-Vision House
282 Wakefield Street

Ministerial Inquiry Into Telecommunications
Level 11
33 Bowen Street

May 25 2000

Late Submission to Inquiry

Dear Sir

Thank you for the opportunity to submit a late submission on behalf of the Internet Society of New Zealand Inc.

The Society considers this Inquiry to be one of the most important to have been conducted in recent years as it will impact on the development of the Internet as the underpinning to the increasingly important Information Economy in New Zealand.

The Society's Working Group on this issue first met on 26 January, 2000 to begin the process of consultation which would allow a full and proper response to this Inquiry.

The Working Group is has undertaken a formal consultation process with relevant parties and after a preliminary submission was drafted we intended to consult with our members and stakeholders before preparing a final document for submission to the Inquiry. This is the same process which led to the Society's Position Paper on the Introduction of the 0867 Number in July 1999, and our subsequent meeting with the Kiwi-Shareholder, and also the then Ministry of Commerce's Telecommunications Group.

To date the Working group has met with representatives of both Clear and Telecom, and has a meeting with Telstra/Saturn shortly. The Panel will therefore understand that the Society was extremely surprised to discover that submissions had closed on May 12 as we actually met with Telecom representatives that day, and received a copy of Telecom's Submission to the Inquiry several days later (dated May 15 2000). (We will contact your webmaster on the issue of the unhelpful web page layout separately.)

As this issue is of such importance the Society appreciates the opportunity to present this preliminary submission based on our work to date. We will continue our normal process of consultation and prepare a submission to the Draft Report due to be published on June 30 2000, and we also wish to make Oral Presentations at the Public Hearings in July/August.

Sue Leader
Executive Director

Level 1, (e)-Vision House
282 Wakefield Street

Submission to the Ministerial Inquiry into Telecommunications

Appendix One | Appendix Two

1. Introduction

The Internet Society of New Zealand, Inc (ISOCNZ) is a non-profit society established in 1995 to foster co-ordinated and co-operative development of the Internet in New Zealand. We also work to safeguard the Internet's philosophy of open and uncensored exchange of information. Our membership includes Internet service providers, web designers, public information groups and Internet users.

The Society is an independent body, not allied to any particular section of the industry, open to anyone who wants to influence Internet evolution and a leading commentator on Internet issues. We represent member views to politicians, industry influencers and the media, and guide development of Internet policy, oversee use and expansion of the New Zealand domain name space, and guard Internet standards.

The breadth of our interest group prevents us giving a single perspective; so we take a higher level view of the use, development and benefits to the community of the Internet.

Attached is the Society's statement of position (Appendix One), released in July 1999 after consulting with members, regarding the introduction of the 0867 service. Also attached is a report from the convenor of the ISOCNZ working group detailing activities and findings in this area (Appendix Two).

2. The Information Economy

New Zealand has consistently been among the leaders in the uptake in Internet services. However, reports indicate that the emphasis in the development of Internet services in New Zealand has been on providing access, with E-Commerce lagging. We believe that as Internet access becomes more universal, businesses will obtain the necessary confidence to rapidly move to develop E-Commerce and other information service solutions.

For this to occur, the high rate of growth in Internet service provision must be maintained. Introduction of economic disincentives to Internet usage, such as time-based charges, or termination charges to ISPs, would create an impediment to achieving this level of access.

3. Regulation

3.1. PSTN Number Plan Administration

Regardless of the merits of the 0867 service, we note with some dismay that this was implemented without the supervision or consultation that would have been required had there been regulatory control over the number plan. The control over the numbering plan puts Telecom at a distinct advantage over other carriers providing PSTN services.

3.2. Kiwi Share and Universal Service

The Society's position regarding the 0867 clearly indicates that most members believe that the principles of the Kiwi Share in the area of free local calling (and especially free calling to Internet dialup numbers) should be maintained. In addition, any change to the regulatory structure must maintain or enhance the basic level of connectivity available to all telecommunications users.

3.3. Interconnection

Internet service operators and carriers have for the last decade recognised that interconnection between networks is a core function of the Internet, and consequently have tended to arrange interconnection between provider networks on a cost-neutral basis. This approach contrasts with the approach taken in PSTN interconnection, and has been demonstrably more successful in terms of timeliness in arranging interconnection and in the benefits provided to all parties when compared to costs or arranging and maintaining the interconnect.

4. Competition

ISOCNZ supports efforts to produce a stable, predictable framework for development of Internet services and usage.

The control of the local loop in most areas by a single provider continues to raise concerns. While ISOCNZ does not see the PSTN as being the long-term mechanism of choice for access to the Internet and other services, the copper local loop will remain the primary means of access for residential users and a large proportion of business users for much time to come. The development of ADSL and similar high-speed access technologies does not alter this, and significant replacement (beyond normal maintenance) of existing copper infrastructure is unlikely within the next 20 years.

Clearly, near-cost access to local loop infrastructure would provide opportunities for organisations to develop high-speed access services over existing copper without requiring construction of an independent local loop service.

5. Summary

ISOCNZ sees the principle of universal cost-effective access to telecommunications and the Internet as essential to the development of the information economy in New Zealand. Wherever possible, competition and innovation in providing such services should be encouraged. Artificial barriers, be they regulatory impediments or interconnection difficulties with incumbent providers, should be avoided.

Don Stokes
ISOCNZ 0867 Working Group

Appendix One
ISOCNZ Position on 0867 Migration - 11 July, 1999

1. Introduction

ISOCNZ representatives met Telecom on Friday, 25 June to discuss the implications of the 0867 service and associated 2c/min charges. The meeting was productive, and covered much ground. This document represents the ISOCNZ's final position (as a result of this meeting, other research into the issue, and a poll of the membership) and largely deals with areas in which the Telecom and ISOCNZ positions differ.

ISOCNZ has analysed the responses given by Telecom, and finds several serious issues with the move to 0867. Consultation with our membership has drawn a divided response on the 0867 issue, however fifty-seven percent of voters on a recent ballot state that ISOCNZ should neither support nor oppose the overall 0867 scheme.

ISOCNZ will maintain a watching brief on the issue and will move swiftly if concerns expressed my members show signs of arising. However, assuming these issues are properly addressed, ISOCNZ does not believe that the move to 0867 represents an immediate danger to the fabric of the Internet in NZ. In fact, if managed properly, there are some potential long term benefits in the use of 0867 numbers, particularly in dial-up number portability.

2. Kiwi Share

ISOCNZ is deeply concerned at the position taken by Telecom regarding the status of data calls as being excluded from "ordinary residential telephone service" and therefore not subject to Kiwi Share obligations.

While Telecom has indicated it will not introduce call charges for Internet or other types of data calls to 0867 numbers, the acceptance of this interpretation by the Kiwi Shareholder would remove any guarantee that this would remain the case in the future.

ISOCNZ does not accept the explanation for this interpretation that data calls lie outside "ordinary residential telephone service" as interpreted in 1988, as long period residential data calls for teleworking and recreational purposes were common and growing at that time. The underlying nature of these calls has not been affected significantly by the move from the character cell terminal technology prevalent in 1988 to the use of Internet protocols and applications, and believe that the rate of growth in these at that time should have given sufficient indication of the trends being experienced now.

ISOCNZ would have much less difficulty with the move to 0867 numbers if it were done within the context of the Kiwi Share, or if a suitably binding agreement were reached that Internet access via the PSTN by residential users would remain free so long as Telecom retains its near monopoly on residential telephone service provision. Sixty-two percent of our voters believe that any sort of charge is unacceptable.

We therefore strongly urge the Kiwi Shareholder to interpret "ordinary residential telephone service" as including data calls from residential lines and to make a public statement to this effect as soon as possible.

3. Definition of Internet Calls

ISOCNZ is also concerned that Telecom reserves the right to determine what constitutes a data service number. We believe this introduces an unacceptable level of uncertainty to services offering "internet-like" services to residential users. We therefore call on Telecom to provide a clear, description of what constitutes a data or Internet service number that will attract a 2c/min residential charge, and therefore should move to an 0867 number.

If this is not forthcoming, we call on the Kiwi Shareholder to rule on what does and does not constitute a call within the definition of "ordinary residential telephone service".

4. Motivations

We believe that the issue of interconnect payments, although discounted in Telecom's response, do represent a significant factor in this move. Even if this were not a factor in Telecom's motivation for this move, it must be recognised that there is an immediate financial effect on those Internet service providers that collect interconnect revenue from Telecom, be it directly or indirectly through another carrier.

ISOCNZ cannot predict whether the removal of these interconnection payments due to moving to an 0867 number will seriously affect the Internet services industry in NZ. Seventy percent of the voters stated that ISOCNZ should not be involved in the level of inter-connect payments.

5. Migration Process

ISOCNZ welcomes the flexibility shown by Telecom regarding the timeframe and compensation for the move to 0867 numbers, and encourages Telecom to follow through. However, we are concerned that "intangible" losses, such as competitive advantage lost to Telecom Xtra and other services unaffected by the move to 0867 due to resources directed to the migration, may not be adequately covered by such competition. ISOCNZ urges Telecom to address any such losses within its compensation plan.

6. Service Level

Telecom's response indicates that it does not expect service levels on PSTN traffic to Internet service providers to drop significantly, with calls dropped only in the event of unusual overloading or emergency.

ISOCNZ believes Telecom should give a legally binding assurance to ISP's of their definitions of what constitutes an emergency, or a danger of overload, the anticipated frequency of such events, and financial penalties against Telecom should services be cut more frequently than anticipated.

ISOCNZ urges ISP's to require such an undertaking from Telecom during negotiations for the transition.

Appendix Two 0867 Working Group Report

May 2000

Activities of the Working Group

The Working Group met with Grant Forsythe (Manger, Industry and Regulation) and Rose Hart (Manager, Government Relations) of Clear Communications on Wednesday, 19 April. The major points made by Clear related to their view of the definition of "local calling", as relating to the interconnection agreement with Telecom. Clear had not signed an interconnection agreement for the 0867 number range at the time of the meeting, preferring to have 0867 numbers delivered to Telecom numbers, and having these forwarded into the Clear network under the number portability agreement. Such forwarded numbers are then treated as normal Clear 91x numbers, and therefore the existing interconnection agreement should (in Clear's view) apply.

This mechanism of using 0867 via call forwarding creates a "tromboning" effect, where large numbers of calls pass from the Telecom core network into the local exchange to which the Telecom numbers are assigned and then are passed back into the core to be forwarded to the Clear interconnection point. Clear points out that this effect is a direct consequence of Telecom's choice to use call forwarding to implement number portability, instead of utilising the Intelligent Network for all call routing. Note that 0867 calls do use the Intelligent Network, so it would be technically possible for Telecom to forward 0867 calls directly to the point of interconnection without tromboning. However Telecom is unwilling to do this, apparently in fear of damaging their legal position regarding the use of 0867 and call forwarding.

Note that call forwarding is charged to Clear by Telecom on a per-minute rate, which reduces (but does not eliminate) the revenue gained through the interconnection agreement.

On Friday, 12 May, the Working Group met with Bruce Parkes (General Manager, Government and Industry Relations) and Roger Ellis (Government Relations Manager) of Telecom New Zealand Ltd.

Telecom now openly states that a significant motivation for the use of 0867 is to address the imbalance of per-minute interconnection fees relating to residential Internet calling, where there is no corresponding per-minute charge to the originating caller. This is a significant shift in position from when we met them in June 1999.

Telecom presented some figures, stating that Internet calling now makes up over 50% of residential PSTN calling, and about 40% of business calling, measured through statistics collected on overall utilisation and statistics collected on calls to known ISP numbers. Telecom states that in the face of this change in usage patterns, it would be remiss of any carrier to assume that old ways should apply to interconnection.

Telecom continues to maintain that Internet calls are not local calls in the context of the Kiwi Share, a position not shared by the Kiwi Shareholder. Telecom and the Government "agree to disagree" on this point, the provision of free Internet calling via 0867 being deemed by the Kiwi Shareholder (under the previous Government) to meet the policy objectives of the Kiwi Share, regardless of the respective positions. While Telecom will not commit to continuing to provide free 0867 calling, they did indicate that there was no plan or intention to introduce charging for 0867 numbers.

Also raised was the fact that while residential calls to 0867 numbers do not generate revenue for Telecom, business calls do. Telecom's position is that businesses wishing to avoid per-minute call charges should be considering a move to ADSL, which can be significantly cheaper if call charging is taken into account.

When asked about auditing of the quality of service provided through 0867, Telecom pointed out that the Ministry of Consumer Affairs administers and scrutinizes the Residential Service Quality Indicators for residential telephone services. The 0867 service is required to maintain the same service levels under the RSQIs as normal local service.

Telecom indicated that they were making significant progress in discussions with Clear over 0867 and related interconnection issues.

Telecom also sanctioned release of the material obtained from the Commerce Commission. This was not strictly necessary; however, it was considered courteous to inform them that the material would be made available. It is now on the 0867 area of the ISOCNZ web site.

Telecom Gain in Market Share

A direct result of the 0867 service has been the rapid gain in market share by Telecom in the area of providing PSTN access to ISPs. This has been largely due to other carriers, especially Clear, refusing to sign an interconnection agreement with Telecom for 0867 numbers. Some of Clear's share has been retained by Clear's use of call forwarding, however the combination of a slow response by Clear and compensation deals from Telecom (notably an alleged $20 million payment to Ihug) has meant that Clear has lost significant ground in this area. However, Clear has been heavily involved in the use of interconnection payments as a form of direct funding, both to itself and to its clients.

Free Internet

The last few months have seen a small number of "free" Internet providers opening for business. Concern has been expressed in some quarters over the viability of these operations, their tactics in obtaining market share, and the role of per-minute interconnection payments in the economics of such operations.

Free Internet providers fund their operations through advertising, where to use the service, the user must have a window on screen showing advertisements, or through providing limited service "for free" with extra service at a price, or combinations thereof. Support is frequently through a 900 number, for example.

It has been suggested that several free Internet providers are providing a "full" service, without extra charges, and without advertising, as a hook to obtain customers from normal ISPs, as the service level being offered is not significantly different to that offered by subscription services. Obviously, such startup phases are operating as loss leaders, and once a suitable customer base is obtained, a lower service level would be provided in the free portion of the package and many customers would return to their subscription services. Some ISPs are unhappy at the extra customer churn and related support costs created by this approach.

Significantly complicating the issue is the use by free ISPs, notably i4free, of interconnection payments to support the provision of free Internet services during this startup phase. In essence, the startup of i4free is being funded not by investors but by Telecom.

Clear/Telecom 0867 Announcement

On Sunday, 14 May, Telecom and Clear announced an interim agreement over 0867. The details of this agreement, especially relating to interconnection payments have not been made public, however in a letter to ISPs, Telecom stated:

"Telecom's actions and objectives over the past few weeks has been to restore a fair and level playing field for all ISP's. This was achieved last weekend by way of the interim agreement between Telecom and CLEAR".

It also states, "Important for the vast majority of New Zealand's ISP community is that the agreement has the effect of removing the termination call payment subsidy," and refutes i4free's Annette Presley's claim reported in the New Zealand Herald that the agreement "cements in interconnect payments".

However, Clear's Zfree free Internet service continues to operate and remains a concern for other ISPs. It is not clear what the future of Zfree is, if there is no funding for the service through interconnect payments. Clear, and its owners, British Telecom, have potentially deep pockets, and damage may be done to smaller ISPs if the service is not viable but is allowed to continue to attract customers from subscription based ISPs. While it should never be the Society's role to oppose entrepreneurship by any entity, there remains a danger that otherwise viable service providers could be damaged by such activities, effectively reducing competition.

Telecommunications Enquiry

The deadline of 12 May for submissions in response to the Telecommunications Inquiry issues paper has now passed without the Working Group completing its consultation process. The Working Group has not been in a position to prepare a submission with the level of consultation that we desire. However an interim submission is being presented to the Inquiry.

The Inquiry is due to release a draft report on 30 June and submissions on this are due by 24 July. Public comment on the report continues until 9 August, with public hearings from 14 August to 1 September. The report is due to be presented to the Minister of Communications on 29 September.

The Working Group plans to submit a full submission in response to the draft report.

Ongoing Activities

The Working Group intends meeting with Telstra-Saturn in the near future. In addition, a meeting with competition lawyers is planned to evaluate the competition aspects of free Internet and interconnection issues.

Longer term, I believe that the Working Group's focus on 0867 is too narrow, and should be expanded to include all telecommunications competition issues relating to Internet service provision in NZ. In particular, the question of access to monopoly infrastructure, especially the incumbent copper local loop, needs to be examined, as this is key to moving away from the limitations and problems using the PSTN for Internet access.

Don Stokes
23 May 2000

© 2000 The Internet Society of New Zealand
Last updated 25 May 2000

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