Lessons from New Zealand on Crown telecom firms

20 Aug
Saskatchewan: land of wheat... and innovation?

Saskatchewan: land of wheat… and innovation?

I wasn’t being entirely serious last week when I suggested that a potential plan B for the Canadian government, in the event that Verizon opts not to expand its wireless operations north, might be to start its own Crown cellphone corporation. But lo and behold just two days later, the Communications, Energy and Paperworkers – which counts many telecom employees among its ranks – echoed the idea with the same suggestion. In light of that, it’s perhaps time to examine the thought a little more closely.

The most obvious comparison to be made is to SaskTel, a provincial Crown corporation in Saskatchewan. The company competes against the likes of Bell, Rogers, Telus and Shaw across a variety of service offerings, including wireless, internet, landline phone and television. Even though the company is a relative flea compared to its rivals, it does pretty well for itself.

In 2012, it posted a profit of $130 million, with a dividend of $84 million going back to the provincial government. SaskTel began its upgrades to LTE wireless the same year, pushing its capital expenditure intensity up to a relatively high 26 per cent. Residents, for their part, seem to like the company, as evidenced by the 1.4 million accounts in a province of only a million people and its good standing in J.D. Power customer satisfaction surveys. This is probably because SaskTel’s prices tend to be better than its bigger rivals.

SaskTel is also known as something of an innovator. It was the first company in North America to launch broadband over Digital Subscriber Line (DSL) and also an early leader in IPTV. All things considered, SaskTel looks to be a successfully run government company that makes a solid return by providing decent services at good prices, with quality investment and innovation to boot.

Despite that, the company is probably not the best comparator for the suggestion at hand because it wasn’t necessarily created for the purpose of being a competitive instigator. A better example of that lies on the other side of the world, in tiny New Zealand.

Fed up with years of high prices and poor service from its incumbent phone company Telecom New Zealand, the government there went out and bought its own internet service provider in 2007 in an effort to spur competitive forces.

The Crown company initially known as THL was originally formed to manage microwave towers, but in 2006 it was rebranded Kordia. A year later, its role changed once the government decided to acquire Orcon, a small ISP that generally bought wholesale service from Telecom, similar to what the likes of Teksavvy and Primus do here in Canada in respect to network owners such as Bell and Rogers.

Kordia itself is very much a hands-off company, according to Paul Brislen, chief executive of the Telecommunications Users Association of New Zealand. The government selects a board of directors, which then picks its own CEO. The board makes its own day-to-day decisions and the government says little about it. Most of its business actually revolves around consulting work in Australia, where it helps build cellphone towers.
“It’s not really like a government-owned business,” Brislen says.

Kordia’s purchase of Orcon was a deliberate attempt by the government to put pressure on home broadband services and prices. “They felt that they could come in and offer an alternative service over infrastructure-based competition,” Brislen says. “That would help regulate Telecom’s price.”

The problem was that the company ended up focusing on the wrong technology, particularly the roll-out of copper-based DSL. The world, however, was rapidly moving toward fibre, which offers superior throughput and efficiency.

A change in government came along, which brought with it a change of focus. The new, conservative government instead chose to build the $1.3 billion Ultra Fast Broadband network, a modern fibre backbone that would bring next-generation service to Kiwis.

Orcon, if it wanted to build its own fibre, was going to need a big cash infusion if it was going to go to the next level. Given the government’s spending on the UFB, that wasn’t going to happen, Brislen says. The ISP was ultimately sold off to private investors earlier this year.

The Orcon experience highlights some potential pitfalls that a government-run telecom company can encounter. For one, it’s easy for bad decisions to be made – especially when it comes to relatively risky bets like technology – and therefore tax dollars to be wasted. It’s also clear that such operations are prone to the mood, and government, of the day. If the CBC is any example, there is an inherent risk to operational continuity; one government may like the idea of running a Crown cellphone company, while the next may not.

On the other hand, for every Orcon, there is also a SaskTel. The bottom line is that if the government of Canada does indeed want to entertain the CEP’s suggested notion, it would do well to study what has worked and what hasn’t, and why.

Still, the idea of a Crown wireless corporation is an intriguing one. Such a company could take up another of my suggestions from last week, in that it could also sell wholesale service on its network to any and all comers. Imagine not just one new competitor to the Big Three, but potentially many. Bell, Rogers and Telus are obviously deathly afraid of Verizon, but this could be the more frightening idea – especially because it’s one their own workers support.


10 responses to “Lessons from New Zealand on Crown telecom firms

  1. mike

    August 20, 2013 at 7:08 pm

    This doesn’t make sense at all. When Bell Canada was under government rate regulation, people still complained prices were too high and cried for deregulation. What do people want, regulation or deregulation? You can’t make public policy on a misinformed public perception.

    • Pat

      August 20, 2013 at 9:37 pm

      I think you are confusing two very different things. Tariffs and rate regulation are ways of keeping monopolies and oligopolies “in check”. They do nothing to spur innovation and real competition.

      True competition, on the other hand, forces companies to innovate and/or compete on price. The real question is: How much competition can the market realistically sustain? Every new player in the Canadian wireless market has either become financially unstable and/or been acquired by larger players.

      The thing I am most curious about is: If a large player like Verizon comes into Canada, does it introduce real competition into the market, or does it simply displace one of the existing providers and not really introduce any benefit for the consumer. My gut tells me that it will be a positive for the consumer, without making the incumbents financially unstable, but I don’t think anyone could give solid evidence either way.

      • mike

        August 21, 2013 at 2:54 pm

        There’s no “true competition” in Saskatchewan. It is duopoly between government-owned Sasktel and privately-owned cable company Access Communications.

  2. Geoff

    August 21, 2013 at 12:01 am

    Recipe for telecom heaven: Combine a crown corporation with structural separation. Either the crown corporation buys out the incumbent network backbones, or starts from sratch in competition with the incumbents. Wholesale to all comers at fair rates and bring on the REAL competition. Bonus points for laying fibre starting in major metropolitan areas and wholesaling wired services as well.

  3. Richard

    August 21, 2013 at 1:16 am

    This is how Canada Post survives: it becomes a telecommunications company.

    • russellmcormond

      August 21, 2013 at 2:33 pm

      BellUsOgers are as much a creation of the state as Canada Post, so it wouldn’t be surprising to see them act just like the “incumbents” if they were to become a telecommunications company.

      The deals (right-of-way/spectrum in exchange for public policy, etc) should be made more explicit and not forgotten so quickly. Governments shouldn’t be allowing their creations to get away with the rhetorical crap they have been tossing at Canadians.

  4. Ryan Shanks

    August 21, 2013 at 2:44 am

    I think its a good idea, running a telecom company. It is a very profitable business, if SaskTel is making $130 million per year, why couldn’t a Canada wide one make over a billion? Any government who sought to turn away from a billion dollars a year would be committing political suicide. Not to mention I wouldn’t mind paying my bill as much if I know the money will go to something useful.

    All and all I think it would be a great idea provided they not only look at it as a way to increase competition, but also a way to make a modest profit per customer for the foreseeable future. It would be stupid if this were some sort of limited time only company that would go away or be sold after it has matured. If they are going to do this, they should keep a tight grip on the company as long as it is viable (not like petro Canada or the 407 (Ontario government))

  5. russellmcormond

    August 21, 2013 at 2:30 pm

    I still believe structural separation is the solution, making Crown the lower-level distribution system and making fully competitive private sector the services built on top. This would end the telecommunications exception to the utility model already in place for everything else that goes into our homes. We are loosing out by thinking the whole stack must be private vs public.

    The net result would be free market competition with minimal government intervention where it makes the most sense, and strong public influence on the last-miles(s) where having overlapping infrastructure doesn’t make any sense. We don’t have multiple competing water/sewer/electricity/gas/driveway connections to our home, and only need a single telecommunications connection…

    Wireless? There are options between monopolised vs “unlicensed”, including having multi-vendor use where all vendors must adhere to specific protocol/etc standards. We have learned so much from WiFI that is lost every time we have a silly spectrum auction…

  6. Michael Elling (@Infostack)

    August 22, 2013 at 10:47 am

    Competitive markets will work, but only if governments understand that applications and end-user demand know no artificial geographic or segment boundaries. HD applications everywhere requires horizontal, highly scalable and highly adaptable “exchanges” or service providers at the lower, middle and upper layers. I do not believe govt led entities, above open access layer 1 approaches, work. Even the latter are highly risky if there isn’t a well developed market of buyers in layer 2 and above; or if they make the wrong technology investment. Governments are terrible at assuming short-term market risk. They bring scale to longer-term ecosystem development but traditionally not short or long-term operating models.

    At the lower layers it is simple, any (AND EVERY) provider granted a public ROW or frequency should be held to a layer 1-2 open access standard with the important quid pro quo that every end-user has a right to access that can’t be blocked by landlords or local governments within economic and aesthetic reason. The latter is the bone to toss to all the lawyers whose work loads will be reduced with simpler regulation. This model will result in tremendous investment in, sharing and scaling of heterogenous wired/wireless networks. Arcane technology or topology distinctions will go away and bandwidth will be freed up to follow moore’s and metcalfe’s laws at every layer and boundary point.

    The failure of structural separation to date is primarily that it has not been applied multilaterally and it has been applied to markets still imbued with or structured for vertical integration. This is why I called the Telecom Act of 1996 a well-intentioned farce back then and roundly decried the CLEC speculative bubble.

    In the middle layers the government should observe, arbitrate and foster (not dictate or regulate) balanced settlement systems and exchanges. These are critical to clear supply and demand horizontally between upper (application) and lower (access/transport) layers, as well as vertically between networks. They include not only settlements, but also addressing directories (aka www, tel#s, aliases, etc…), but also settlement pricing and transaction fees.

    Importantly balanced settlements, which differ from 2-sided settlements, will afford centralized procurement models to supplement the unstable advertising internet model. Centralized procurement means that edge consumption will not only be priced lower on a per unit/bit basis, but that the potential revenue per end-point is potentially infinite. Bill and keep actually precludes this from happening and leads to concentration and monopoly (what we are seeing in the transport layers today in the internet). Bill and Keep had its day in the sun in the 1980s-90s because a) the marginal cost of transport was so low relative to other costs and prices in the information stack, and b) it was a lot less expensive than metered mediation.

    In the upper layers, the governments need only watch for potential application or operating system monopolies, or interference with other laws (copyright, content restrictions, physical layer/process laws such as operating taxis, etc…). Given all the big players currently involved between the datacomm and incumbent telecom/cable players this issue is moot as long as lower layers are open and no undo addressing or exchange monopolies develop in the middle layers. For example does the government need to intervene in the iOS vs Android battle? And the answer is no because we have effective equal access in the lower layers in the smartphone because Steve Jobs forced in on AT&T with wifi offload.

    Where does this get us? Probably between 10-15 very large layer 1-2 companies globally with dozens of regional players and hundreds of local players. There will be thousands of brokers in the middle layers given the enormous commercial complexity and opportunity for infinite information pathways (and constant software/hardware adaption in the control layers) and of course millions of participants in the upper layers creating applications and satisfying unbounded demand. That’s the enormous opportunity of what awaits us; if only we can get over of the 100 year infatuation with the vertically integrated government granted monopoly.

    Can we get there? Of course because the market is driving us there and we have perfect blue-prints in the competitive WAN, data and wireless markets of the 1980s-90s. The government(s) just lacked the willpower to extend horizontal networks into the last mile in the late 1990s.

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