Strategic Interaction under Asymmetric Regulation - Adoption, Usage, and Global Impact of Broadband Technologies - page 33

Figure 2. New Zealand Telephony Network Traffic 1996-2003 (Source Howell & Obren (2003:33))

est internet users. Over the period 1996-99, whilst
the market share of ISPs signed up to Telecom's
rivals grew to slightly over 50% (Enright, 2000),
undoubtedly more than 50% of the internet traffic
was terminating on rival networks (Howell, 2008).
The effect of reduced ISP fees is reflected in Boles
de Boer, Enright & Evans' (2000) comparative
analysis of the ISP market in Australia and New
Zealand. Whilst New Zealand had fewer than one
third of the number of ISPs per capita of Austra-
lia, the number of ISP accounts per capita was
10% higher and prices on average 30% lower.
The consequences of ICA arbitrage, however,
were financially crippling for Telecom. Due to
the 'free local calling' obligation, the firm was
prevented from generating any additional revenue
from residential dial-up internet usage. At the time,
the average monthly residential line rental was
$30 per month. The consumption of an average
dial-up internet connection customer at peak times
was generating an ICA liability of $36 per month
per dial-up internet account. As ICA incentives
likely resulted in a skew such that ISPs aligned
with networks other than Telecom signed up a
majority of the heavy users, the average monthly

liability in excess of income per account for Tele-
com likely substantially exceeded the implied $6
cash deficit (Howell, 2008a).
Telecom's response to the strategic threat
posed by its rivals was two-pronged. The first
response was commercial: technological bypass
of the dial-up PSTN with a new, unregulated
ADSL broadband service. The second response
was political: renegotiating the terms of the 'Kiwi
Share' to enable recovery of the costs imposed by
burgeoning internet use and strategic arbitrage on
the ICA by its rivals.

Telecom's Response #1: Strategic
Broadband Investment

The first response was rapid investment in the
successor broadband ADSL technology (New
Zealand was the third country in the OECD to
offer a commercial ADSL service when it went
live in January 1999 - Howell, 2003). High speed
(2Mbps was the basic offering) ADSL was made
available widely (85% of customers by 2002 - ibid )
and low-priced (one of the cheapest per megabit
second in the OECD in 2000 - OECD, 2001) in