0867 Working Group Report 26/05/00
Report to Council 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.
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
Unfortunately, the deadline of 5 May for submissions in response to the Telecommunications Inquiry issues paper has now passed, and the Working Group has not been in a position to prepare a submission. A draft report is due to be released on 30 June and submissions in this 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.
It may be possible to submit an interim report from the Working Group to the Inquiry before the draft report is released.
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 1 June 2000
