Thursday, April 21, 2011

$12m fine adds insult to injury

Telecom New Zealand has been fined $12 million by the High Court for "misuse of market power" between 2001 and 2004. The fine relates to the prices Telecom charged for its data line "tails" (the last part of the line to a customer's premises). Already I can hear the whingers and bludgers in this country cheering from the side lines, where they always sit. Big, bad Telecom has been punished for its anti-competitive conduct, I hear them say.

Let's examine the history of Telecom. It was sold by the Labour Government in 1990 for $4.25 billion. The Government choose to sell the entire business and network to its new shareholders, principally Bell Atlantic (now Verizon) and Ameritech (now AT&T Midwest). The only significant caveat imposed on the new company in the sale by the Government was the Kiwi Share agreement by which the company was required to continue to provide fixed price local line calling across the entire country.

Over the next ten years, Telecom invested significantly in new telecommunications infrastructure in New Zealand including the largest mobile phone network, broadband internet services and establishing Xtra, the country's largest internet service provider. Anyone who remembers what telecommunications services were like under the old Government-owned Post Office telecommunications division and the short-lived, state-owned Telecom, will know that the privately-owned Telecom improved services out of sight, largely eliminated waiting times for new lines, and reduced prices significantly in real terms. Over the same period, competitors to Telecom were established and grew significantly - Clear Communications and Saturn merged into TelstraClear, Vodafone set up and became a major competitor in the mobile market, and a miriad of smaller and specialist telecommunications companies were established and prospered.

In 2001, the Labour Government began its serious assault on the company its predecessor had sold for $4.25 billion with the passing of its Telecommunications Act and the establishment of a Telecommunications Commissioner. This was followed by the 2006 announcement that the Government would require Telecom to "unbundle" its local lines from its other services. This edict, which preceded any legislation by more than six months, knocked more then $2 billion off the price of Telecom shares. Bear in mind that by this stage, the big US telecommunications companies had largely sold out of Telecom and the loss was sustained primarily by "Mom and Pop" investors in New Zealand. The announcement was very poorly handled, being leaked to the media in advance, which exacerbated the loss.

In November 2006, the Labour Government passed its Telecommunications Amendment Bill, which would force Telecom to break itself into three separate companies, with network access separated from the wholesale and retail units. The new act effectively nationalised the Telecom network without compensation for shareholders. The market's assessment of the loss resulting from this expropriation was the more than $2 billion decline in Telecom's share value. Since then, in spite of the prospect of further expropriations, Telecom has continued to invest in New Zealand's telecommunication infrastructure, building the new XT mobile network and upgrading exchanges and circuits to new fibre-based technologies.

So, having sold Telecom to its shareholders for $4.25 billion, the Government has effectively stolen its assets back without recompense, and now the High Court has imposed a fine on the company for using what were its own assets to its financial advantage. Am I the only person who sees something deeply immoral in the Government's actions?

Telecom directors and shareholders face a real dilemma. If they make money, the Government and the courts are going to cane them. And yet the Companies Act requires that the directors "act in the best interests of the company". What on earth are they expected to do? Do the Government and the New Zealand public expect Telecom to be a charity?

I guess that is exactly what people in this country expect. I continually hear this bullshit about corporate "social responsibility" as if that should be the highest goal of any company. What about survival - is that unimportant? What about making money so it can employ people, pay dividends to its investors (including all those "Mom and Pop" investors who are counting on those dividends to pay for their retirement or to send their children to university), and invest in new technology so that New Zealand has a first class telecommunications infrastructure?

Actually, I know the answer to the last part of that question - we don't need Telecom to invest because the Government is going to do it for us through its Ultrafast Broadband initiative. But haven't we proven once before in this country that the Government can't build and manage an efficient telecommunications infrastructure? Bear in mind that the Government has just announced that its sponsored broadband companies will be guaranteed immunity from the anti-competitive oversight of the Commerce Commission. Hang on, I thought that anti-competitive behaviour was the reason for the record High Court fine imposed on Telecom? So anti-competitive oversight should only apply to the nasty people at Telecom, is that what the Government is saying?

Having sold Telecom for a fair price, the Government has come back and plundered the company. The network assets belonged the company and its shareholders. There was competition in the market and any undue advantage (whatever that expression may mean) that Telecom had gained from its ownership of the tails was being eroded by the introduction by all telecommunications companies of fibre cables and wireless services.

The actions against Telecom by successive governments are outright theft. The only fair thing for the Government to do is to compensate Telecom shareholders for their losses through the expropriation. The Government should stop wasting taxpayers money and get out of the telecommunications business completely. The Telecommunications Commissioner is unnecessary and his office should be abolished. The Commerce Act only discourages true competition and should be abolished. Only then might we see New Zealand's telecommunications infrastructure become one of the world's best.

I won't hold my breath.