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• Appendix 1

• Telecommunications

• Benchmarking

• Archive

• 30 June 2005 Report
• 30 June 2004 Report

• Analysis
• Residential Telecommunications Services: OECD Basket Comparisons
• Business Telecommunications Services
• Capped Price Calling Options
• Fixed Network Calls to Mobile Telephones
• Statistics New Zealand Inflation Measure
• Ministry Comment and Conclusions
• Information on Call Minute Usage across OECD Countries

Analysis

1. The services covered in this section are the key standard services provided via the fixed telephone network. These services include residential and business local calls (including dial-up Internet access calls), national calls, and calls to mobile phones. The price of international calls and value-added services such as call waiting, caller display and call minder are not considered in this analysis.

2. The price of "baskets" of residential and business telephone services in New Zealand was compared with that in other OECD countries to benchmark the relative price performance of fixed network telecommunication service offerings in New Zealand. New Zealand's relative performance using the OECD tariff basket comparison methodology is summarised in the following table.

Residential Telecommunications Services: OECD Basket Comparisons

3. Using the standard OECD basket of services, Telecom New Zealand's price of residential telecommunications services was ranked 23rd out of 30 OECD countries at 119% of the OECD average. Australia was ranked 24th.

4. The standard OECD residential basket of services was modified to better reflect the high level of residential telephone service local call usage in New Zealand. Recent call minute data published by Telecom New Zealand¹⁰ is summarised in the following table.

5. Some other OECD countries also have significantly higher residential calling volumes than the OECD tariff comparison allows for, although not as high as New Zealand. It is likely that these higher volumes are largely driven by dial-up Internet access service. In New Zealand's case it is understood that about 60% of the residential local call minutes are dial-up Internet calls (~1,000 call minutes per month).

6. Taking into account this information, two nominal baskets with ~1000 and ~1500¹¹ call minutes per month were used to better assess New Zealand's relative performance. With these baskets of local calls, New Zealand's residential telephone service relative pricing performance was ranked in the top quartile of OECD countries (8th and 2nd respectively). While these modified basket comparisons more accurately reflect typical usage in New Zealand, they may less accurately reflect standard residential call usage in other OECD countries that have call usage closer to the standard OECD basket call volume.

7. The following graphs shows the results of four cases. Case A is the standard OECD basket. Cases B & C are the higher local call usage cases. Case D is the residential telephone network access case and excludes calls because the primary purpose is to compare the lowest price of access to the network across OECD countries.

Residential Telephone Service OECD Basket Price Comparison, February 2004

→ Full size version of "Residential Telephone Service OECD Basket Price Comparison, February 2004" [40 KB GIF file]

8. The overall results of the four cases considered as a whole and taking into account the high level of local calling¹² especially for dial-up Internet access suggests that the relative performance of New Zealand residential user telephone service is satisfactory.

Business Telecommunications Services

9. The cost of a standard basket of telecommunications services for a small business (1110 call minutes per month) in New Zealand is 19% higher than the OECD average.

Business Telephone Service OECD Basket Price Comparison, February 2004

→ Full size version of "Business Telephone Service OECD Basket Price Comparison, February 2004" [35 KB GIF file]

10. The OECD measure does not take into account any discounts provided to business users. In centres where an alternative provider of business telephone access service is available, the price of network access and business local calls can be significantly lower than the standard Telecom business telephone service pricing. Inclusion of such lower prices by use of a weighted average price would improve New Zealand's relative performance. For example, if the weighted average access and call price was 10% (or 20%) lower than the standard price, New Zealand's relative performance would improve to 21st at 98% (or 19th at 88%) of the OECD average. It is estimated that business telephone service pricing would have to reduce by in excess of 25 % to rank relative performance in the top quartile of OECD.

11. Taking these points into account, business telephone service pricing performance is considered to be on a par with the OECD average.

Capped Price Calling Options

12. A range of capped price calling options for national and international residential user calling are available in New Zealand from a number of providers (see the table below for typical examples). Such plans can reduce the average per minute cost of calls and are likely to be valued by customers, particularly those who need to make longer duration calls. Only three other OECD countries provide capped price national call options. Only one other OECD country, Australia, provides capped price international call options.

Fixed Network Calls to Mobile Telephones

13. The following table and graph show the price performance of New Zealand on fixed-to-mobile calling relative to other OECD countries. Termination of calls from fixed networks on mobile networks represents about 7% of telecommunications revenues in New Zealand.

Relative Price of Residential and Business User Fixed-to-Mobile Telephone Calls, February 2004

→ Full size version of "Relative Price of Residential and Business User Fixed-to-Mobile Telephone Calls, February 2004" [30KB GIF file]

14. The relative performance of New Zealand on these measures would improve if the lower price for fixed-to-mobile calling offered by competitors to Telecom is taken into account. Telecom recently reported that the average revenue (excGST) for fixed-to-mobile calls was 43.6 cents per call minute. The comparative price in Australia was 38.5 cents (Australian).

15. Some operators in other countries also offer special rates for fixed-to-mobile calls. For example, Telstra offers the following:

16. Telecom New Zealand fixed-to-mobile call data indicates that the fixed-to-mobile call minute data used in the standard OECD tariff model is in line with fixed-to-mobile call rates in New Zealand, and consequently this comparison methodology is representative of New Zealand demand conditions.

17. In New Zealand the calling number pays (caller pays principle - CPP) for calls to mobile (or cellular) users. This is the case in most OECD countries.

18. In the US the receiving number pays (receiver pays principle -RPP). This payment arrangement has apparently lead to more efficient pricing of calls terminating to a mobile user than use of CPP, in particular it has arguably led to capped price unlimited call options on mobile networks in the US.

19. In general, the above referenced fixed-to-mobile OECD comparison methodology is suitable only for comparisons involving CPP.

Statistics New Zealand Inflation Measure

20. Statistics New Zealand produces price indices for three baskets of telecommunications services: residential local telephone service - rental and installation, residential local telephone service rental, residential long distance calls.

21. This series shows a downward trend in the real cost of residential telephone service and long distance calls since 1991. In recent years there has been no significant decrease in per minute prices for short duration calls. Rather, competition seems to have focused on reducing capped call prices and one off price specials.

Statistics New Zealand Real Residential Telephone Service Price Index, March 1991 Base = 100

→ Full size version of "Statistics New Zealand Real Residential Telephone Service Price Index, March 1991 Base = 100" [19 KB GIF file]

22. Statistics New Zealand does not provide a description of the methodology that it uses to produce this index, making it difficult to assess the accuracy and reliability of this price indicator.

Ministry Comment and Conclusions

23. Using the standard OECD basket of fixed network telephone services and taking into account limitations of the benchmarking methodology used, New Zealand's relative performance in residential and business telephone service is a little above the OECD average. In both cases the relative performance only just makes it into the third quartile of OECD relative performance.

24. When the OECD residential basket of telephone services is modified to better reflect actual call use by most residential users in New Zealand, New Zealand's relative performance ranks in the top quartile of the OECD. It is notable that New Zealand residential telephone service users is one of a small number of OECD countries where users have access to a significant range of capped price calling options, including in some cases unlimited call options.

25. The average price of residential fixed-to-mobile calling was found to be significantly higher in New Zealand than the OECD average and relative performance was in the fourth quartile of OECD countries. However, this ranking does not take into account the availability of lower priced fixed-to-mobile calls available from competitive providers.

26. The average price of business fixed-to-mobile calling was found to be on a par with the OECD average and relative performance was in the lower part of the third quartile of OECD countries.

27. The unit price of national calls, as measured by the Statistics New Zealand CPI, has not reduced significantly in the last three years.

28. It is of concern that the price of data service can not be benchmarked with other OECD countries. It is recommended that the Ministry develop a means of reliably benchmarking the price of data services to small to medium business. This is not possible at present because the necessary information is not available due to the high level of discounting off the so called standard list price.

29. In general New Zealand's relative performance in most categories is unsatisfactory and typically there is a very significant gap between New Zealand pricing performance and that of countries in the top half of OECD performance.

Information on Call Minute Usage across OECD Countries

30. Call minute usage information is useful as it provides a basis for assessing how applicable the standard OECD tariff basket comparison methodologies (which use a set number of call minute) as well as providing a basis for benchmarking the relative uptake and usage of particular call services between OECD countries. However, this type of information is not readily available.

31. Information from a number of sources suggests the following average call minute usage.

32. Information published by Telecom New Zealand on average call minute usage for the first 9 months of 2003/2004 is summarised in the following table.¹³

33. Information published by Telstra Australia on average call minute usage for 2003/2004 is summarised in the following table.

34. The OECD tariff basket comparison methodologies average call minute usage is summarised in the following table.

35. The following table records the % difference of the average call minute usage for the above countries with the relevant standard OECD tariff comparison basket usage.

36. The results suggest that the OECD residential basket tends to be unrepresentative of typical residential user call minute usage in these countries, particularly for New Zealand and Australia.

⁸ ~300 local, 60 national and 20 fixed-to-mobile call minutes per month.

⁹ ~880 local, 170 national and 60 fixed-to-mobile call minutes per month.

¹⁰ Telecom Management Commentary on Nine Months Result - 7 May 2004

¹¹ The average residential telephone service use is understood to be in the region of 1500 call minutes per month.

¹² Data published by Telecom Markets suggests that that in 2003 UK residential user average about 790 call minutes per month, German users averaged 640 call minutes per month. Telecom New Zealand data

¹³ It has been assumed that Telecom has 80% of the residential national call usage originating on its network and 95% of the residential fixed-to-mobile.

¹⁴ Local call usage estimated on the assumption of an average call holding of 15 minutes.