Corner's column: the cost of local monopoly

A report on the New Zealand telecommunications market released in early November by second carrier Clear Communications precipitated a storm of publicity. The report claimed that Telecom NZ's monopoly over the local loop was costing New Zealand users $NZ382 million per year through monopoly pricing.

Telecom NZ was quick to dismiss the report's findings, claiming it was "shoddy", "politically inspired" and that its figures for corporate and many other customers "bear no relationship with reality".

Telecom NZ CEO Rod Deane went on to say it was "unbelievably disingenuous to say that new technologies [such as hybrid fibre coaxial cable] are not rapidly opening up the local access market".

The report's findings, if accurate, were not reflected in Telecom NZ's results. The following week, the telco reported second quarter results with after-tax profits marginally lower than the previous year. Telecom NZ blamed intense competition and the sluggish NZ economy for its poor showing.

However, the report's findings are not far removed from those of an earlier study of the New Zealand market, produced in 1996 by US economist Dr David Gabel.

The Clear report concluded, based on its cost modelling, "that the provision of local services generates monopoly profits of around $NZ382 million per year . . . over and above a reasonable return that these services would earn in a competitive market".

Gabel concluded: "Telecom NZ's local service network is highly profitable . . . once the contribution from short-haul tolls produced using these facilities is taken into account, the contribution is estimated to be between $NZ174 million and $NZ337 million over and above the cost of Telecom NZ's local service network."

In Australia also, Telstra's local loop monopoly remains largely unchallenged. Optus sunk billions of dollars into a cable TV/telephony network in a bid to break this monopoly. Its strategy has so far been a failure, thanks to Telstra's massive retaliation, with a competing network passing virtually the same houses, and problems with the telephony technology on the Optus network.

Just as in New Zealand, Optus and other competitors claim they are paying too much for access to Telstra's local access network; and like Telecom NZ, Telstra claims its prices are fair.

But whereas in New Zealand it would require a political decision and government intervention to change the status quo, Australia already has that mechanism and its wheels are well in motion: the Australian Competition and Consumer Commission inquiry into declaration of local accesss.