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• 9. Pricing Developments

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9.1 Local Telephone Service Pricing and Service Availability

In 1991 to better reflect costs Telecom reduced business telephone line access charges and introduced local call usage charges. This was because in many areas the business sector places the greatest peak demand on the telephone network which is dimensioned to carry the peak call loading.

In July 1994 Telecom introduced a city access business telephone pricing option which reduced the business telephone access rentals in high density central business district locations by 15% on the standard rate. The rate applies to specific building locations.

The following table sets out Telecom's current standard business telephone line access rental tariffs.

Very large telecommunications services users can typically qualify for up to a 10% discount on business telephone line rentals and call usage charges under Telecom’s premier plan. Discounts of 10% or over must be disclosed under New Zealand’s telecommunications information disclosure regulations.

Residential Telephone (Standard) Service Price Increases: Full details of Telecom's 1 January residential telephone service rental, at each price rise and in 1 November 1989 $ terms, are outlined in the table below.

It can be seen that Telecom has met this requirement of the Kiwi Share Obligations.

Residential Telephone Service Availability: Since the date of adoption of the Kiwi Share Obligations in September 1990 Telecom has met the requirement that the line rental for residential users in rural areas be no higher than the standard residential (telephone) rental, and has maintained residential telephone service availability as widely as at the date of adoption of the Articles.

9.2 Initial Long Distance Call Price Developments

It is in the national calls market that the most significant price reductions have occurred.

Telecom's initial tariff structure, which it inherited from the New Zealand Post Office, placed tremendous emphasis on the distance of the call. Compared to other OECD countries New Zealand toll tariffs had the highest correlation of tariffs with distance, and hence the lowest correlation of price with volume on any particular route. Consequently, Telecom's 1987 tariff structure did not reflect the underlying costs involved in providing the service.

In 1987, the toll call tariff table comprised 10 charging steps, and ranged from 6.6 cents per minute (c/m) to 144 c/m (all prices are GST inclusive) for calls made at peak times, and from 2.2 to 47 c/m for calls made at off-peak times.

In 1988, anticipating competition, Telecom re-balanced the price of long distance calls and the residential telephone service rental. This was done by reducing the cost of long distance calls and increasing the cost of residential telephone service. The minimum charge time for toll calls was also reduced from 3 minutes to one minute, with subsequent time periods rounded up to the next full minute.

Another major change in tariff structures was the increase in the number of charging bands according to when a call was made - whether it was a week day or a weekend or national statutory holiday, and also the actual time of the day. The number of bands increased from three to four.

In 1991, Clear Communications introduced 6-second rounding for national calls, applicable after the first minute. In 1992, Telecom responded with 1-second rounding for calls exceeding one minute, and this was immediately matched by Clear Communications, who also extended the practice to international calls. Telecom also adopted 1-second rounding for international calls. This change to tariff structure further reduced long distance call costs.

The cost of transmitting calls has changed dramatically as a result of the introduction of fibre optic cable based transmission systems. A more cost-oriented tariff structure required a shift towards a higher degree of correlation to the volume of traffic carried on any particular route, otherwise service providers would be vulnerable to competition on the high volume routes, for example between Auckland and Wellington. Consequently, the greatest reductions in price have occurred on the main routes, a fact reinforced by the actual price reductions.

In December 1992, Telecom introduced special rates on the following main trunk routes: Auckland-Hamilton; Auckland-Wellington; Palmerston North-Wellington; Wellington-Christchurch; and Christchurch-Dunedin. The effect was to lower Telecom's prices below those of Clear's existing base rates on these routes. In February 1993, Clear introduced new rates for city to city calls for 10 routes. In April 1993, Telecom, in turn, introduced new rates for calls over 20 major routes between 14 designated cities, including the main six cities. The effect was to match Clear's existing base rates on these routes. In May 1993, Clear responded to Telecom's April price changes by extending its own city-to-city base rates and lowering slightly other tariffs. Telecom promptly reacted announcing its intention to "match or better" the prices of its competitor.

Telecom introduced a city-city tariff structure in July 1994 replacing the earlier special rate structure between larger centres. The rates recognised the scale economies of providing long distance call transmission connections between the large centres of population.

Following these initial price tariff reductions subsequent competitive behaviour has largely been confined to discounting packages of services. It is notable that in 1993 Telecom adopted a national calls pricing policy of "match or better" the prices of its competitors.

9.3 Other Recent Pricing Developments

There have been substantial reductions in international call prices. Based on Telecom’s normal advertised rates, residential customer peak period prices have reduced in real terms by about 34% to Australia, 41% to the US and the UK and by about 16% to other destinations. Telecom’s off-peak prices have reduced by about 46% to Australia, 48% to the US and the UK and by about 60% to other destinations. Larger effective price reductions apply for long duration calls, an example being for calls longer than 30 minutes which have a 30% discount off the existing peak period base rate.

A large call-back provider quotes rates for calls to the US and the UK about 50% less than Telecom’s non-discounted peak period rate.

Telecom has reported discounts of up to 39% off the base national call retail tariff for high volume users.

Telecom recently substantially reduced its leased circuit tariffs.

9.4 Current National Call Tariffs

9.4.1 Telecom National Call Tariffs

A detailed description of national call tariffs and movements, follows.

National call usage charges have the following general structure. There are currently four time of day charge bands as follows:

• Rate 1 Morning: 9am-12noon
• Rate 2 Afternoon: 12noon-6pm
• Rate 3 Economy: Monday-Friday 6pm-10pm; Saturday, Sunday and national holidays 8am-10pm
• Rate 4 Night: every day 10pm-8am

The approximate relationship between the charge bands is:

• Afternoon: about 80% of morning tariff
• Economy: about 60% of morning tariff
• Night: about 30% of morning tariff

The Telecom national call base tariffs from 1990 to the present time are outlined below:

Telecom’s National Call Tariffs at 30 October 1990 (GST exclusive)
[effective up to about early 1993]

Telecom’s Current National Call Non-City-to-City Tariffs (GST exclusive)
[Applicable from about mid 1993]

Telecom’s mid 1993 national call new non city-to-city tariffs were a reduction of 3% on the previous tariffs.

Telecom’s National Call City-to-City Tariffs (GST exclusive)
[Applicable from about mid 1993]

% Reduction of Tariffs by Introduction of City-to-City Rates for Particular Routes

Note: H » C4 only applicable between adjacent main centres, Auckland-Wellington, Wellington-Christchurch, Christchurch-Dunedin

9.4.2 Clear National Call Tariffs

Clear’s Residential National Call Non-City-to-City Tariffs (GST inclusive [GST rate is 12.5%.] )

Clear’s Residential National Call City-to-City Tariffs (GST inclusive)

Clear’s Business National Call Non-City-to-City Tariffs (GST exclusive)

Clear’s Business National Call City-to-City Tariffs (GST exclusive)

Clear also has residential and business customer discounts, see later.

9.4.3 Telstra National Call Tariffs

As referred to in the Metro Group (authorised reseller of Telstra New Zealand) Toll Saver Plan for domestic users.

• Rates - National: (discount based on Telecom standard rates)
• 28% discount - calls between Main Centres
• 18% discount - calls between Provincial Centres
• 15% discount - calls between Regional Centres

9.4.4 Effect of Price Inflation on Telecom’s National Call, Base Tariff Rates

Thus far we have established the change in the nominal base national call tariffs. However, the affect of inflation has to be taken into account to establish the real change in national call base tariff rates.

Over the period September 1990 to March 1997 the consumers price index (CPI) rose 13.46%. The CPI is generally regarded to be the most appropriate inflation index to adjust consumer prices for comparison over different time periods.

It is readily seen that Telecom’s non-city-to-city national call base tariff rates reduced in real terms by 14.5% over the period September 1990 to March 1997 (11.5% from inflation and 3% nominal reduction in tariffs.).

The following table shows the change in the all groups CPI over the period Sept 1990-March 1997.

The following table sets out the real reduction of Telecom’s city-to-city national call base tariffs over this period, using the all groups CPI as a deflator.

% Reduction of Real Telecom Tariffs by Introduction of City-to-City Rates for Particular Routes

Note: H » C4 only applicable between adjacent main centres, Auckland-Wellington, Wellington-Christchurch, Christchurch-Dunedin

It can be seen that there were substantial real reductions in the national call city-to-city base tariffs over the period September 1990 to March 1997 by somewhere between 49% and 18% dependent on route and time of day.

9.5 Discount Practices

Clear and Telecom offer discount packages to both business and residential customers. These are largely based on the volume of toll business generated and the duration of calls.

Telecom first introduced national and international call discounts and special promotions in early 1992. Discounts of up to 10% were allowed as an interim approach and this was replaced in 2Q 1992 with a range of discount plans such as the Brilliant Deductions Call Plans, the Telecom Connect Plans, and the Residential Friends and Family Call Savings Plans. These plans have since been refined and added to.

Clear offers a one percent discount off the current month account if payment is made by the due date. If the customer complies with this by making a direct debit payment, the discount is increased to two percent. Telecom began offering a one percent discount to customers who chose to direct debit payment of bills, in August 1994.

9.5.1 Clear National Call Discounts

Clear residential national call discounts:

Clear business national call discounts, 14-20%.

9.5.2 Current Telecom Residential Telephone Customers Call Savings Discount Structures

Telecom New Zealand operates four residential telephone service discount savings plans. These are limited to savings on long distance direct dialed calls (i.e. they do not apply to land or cellular calls etc). For fuller details see Telecom's List of Charges. The plans are:

• Friends and Family National Calls all Day Plan
• 29c National Plan
• Friends and Family International Calls Plan
• World-wide Plan

All customers are automatically enrolled in the Friends and Family National Calls all Day Plan unless they request an alternative plan. A customer has to request enrolment in the other discount plans, and can only be enrolled in one of the National Calls plan or the Off Peak National Calls plan.

Friends and Family National Calls Plan

Discounts are as follows:

The 29c National Plan

The 29 cent price per minute (GST inclusive) applies only in the off peak time. Calls made at peak times are charged at standard Morning and Afternoon rates.

Friends and Family International Calls Plan

Discounts are as follows (note, only applies in off peak period), normal rates apply in peak period.

Worldwide Plan

Discounts are as follows: (note, only applies in the off peak period, normal rates apply in peak period).

9.5.3 Current Telecom Business Telecommunications Services Customer Savings Discount Structures

Telecom offers a range of standard telecommunication services business discount plans as described below. It should be noted that New Zealand law requires Telecom to disclose discounts larger than 10% for a range of prescribed telecommunications services. Some discount plans have a condition requiring the customer to source from Telecom all the organisations requirements for telecommunications services covered by the plan, in order to qualify for the plan's maximum discount. Such discounts have been referred to as 'bundling'.

Small and Medium Business User (Brilliant Deductions)

Not available in conjunction with other plans. Can combine telephone numbers at different physical locations belonging to the same business entity. This can be regarded as a small to medium business telecommunications services discount plan.

The savings are as follows:

Note: This plan was introduced in about mid 1992 in the following form with savings as shown, at that time:

Business Plan for Companies with Nation Wide Offices

The Connect range of plans includes an expenditure target discount on most telecommunications services. An annual billed revenue bonus of 2% credit in year 1 and a 3% credit in year 2 apply on all qualifying services. See Telecom’s TLOC [Telecom List of Charges] for a detailed list of qualifying services. The call savings are as follows:

Connect 24

The plan is aimed at the Hotel industry. The savings are as follows:

The Connect call discount saving plans at about mid 1992 were:

Telecom Connect Government Plan

A plan is aimed at government agencies and provides Government agencies with call plan discounts, where the annual toll call spend exceeds $50,000. The savings are as follows:

Telecom Association Plans

The plan is aimed at officially recognised associations and allows aggregation of nominated accounts. An annual billed revenue bonus of 2% credit in year 1 and a 3% credit in year 2 applies on all qualifying services. Some associations also receive a 14% discount on 0800 calls. The savings are as follows:

Telecom Business Affinity Call Savings Plan

The plan is aimed at businesses who form a recognised common interest group. The group must have a collective toll expenditure of at least $50,000 pa. The savings are as follows:

Telecom Chamber of Commerce Savings Plan

The plan is aimed at Chamber of Commerce Members. The savings are as follows:

Telecom Premier Plan

The plan seems to be aimed at business telecommunications users who spend in excess of $200,000 pa. The savings are as follows:

*Excludes calls made to 0900 numbers.

Notes: The ABR discount is outlined in The Telecommunications (Disclosure) Regulations: Prescribed Services of 30 September 1996. The ABR discount is negotiable above $3 million. The term discount is 1% for 12 months, 2% for 24 months, 3% for 36 months. The loyalty discount depends on prompt payment, accessible location, account management and sole provider, and is paid on net balance after other discounts.

For Premier toll call volume discounts, refer to appropriate business discount scheme.

9.5.4 Telecom National Calls Discounts Summary and Conclusions on Change in Effective Real Price

Inspection of the level of Telecom discounts suggests that the base price of an average length national or international call is being discounted as shown in the following table. In some circumstances slightly higher discounts are available, particularly for large users.

Note: *19% applies to main routes with Government Plan.

Discounts for international calls vary by route, particular for large volume use.

It is interesting to compare how the level of discounts has changed from those applying at mid 1992. The following table details the approximate discount applying at that time for the above table categories.

Business discounts are mainly dependent on call volumes. The transition point from small to medium was arbitrarily chosen as an annual national call spend of $12,000, and the medium to large transition point at a call spend of $75,000.

9.5.5 Special Offers

Both Clear Communications and Telecom have reduced toll prices by the introduction of occasional toll call "special" prices. These "specials" are usually offered on weekends. For example, on 21/23 March 1997 Telecom offered residential direct dialled calls to Australia for a maximum price of $15 per call (including GST). Clear offered a special for Clear direct dial customers of off peak charges applying to peak hour calls in June 1997.

Clear and Telecom run "$5 (including GST) talk as long as you like specials" on weekends (6 pm Friday to 8am Monday)and week nights (6pm to 8am). These specials will run until the end of 1997.