Strategic Interaction under Asymmetric Regulation - Adoption, Usage, and Global Impact of Broadband Technologies - page 36

accounts in 2003 (Figure 3). Whilst low-priced
ISP accounts remained the norm, in the absence
of extensive interconnection cash flows, the 'free'
ISP model induced by the contractual arbitrage
had effectively disappeared by 2001, with minimal
effect upon the number of internet accounts per
capita (Karel, 2003).
Even though Telecom's ADSL prices were
very low by international standards (New Zea-
land is still amongst the OECD top quartile in
registering low ADSL prices (per month and per
Mb/s), highest speed offered by an incumbent,
and low price per additional MB over prescribed
caps - OECD, 2008), substitution from dial-up
to broadband continued to be sluggish until 2004.
Figure 3 indicates that New Zealand broadband
uptake is driven predominantly by substitution
from dial-up usage rather than new internet users
purchasing accounts. As prices did not change
substantially in 2004, the most logical explana-
tion for the increase lies in changes in demand
arising from new applications conferring greater
consumer benefit from broadband than dial-up.
Howell (2008) identifies that increases in usage
of New Zealand's most popular web property
TradeMe and the emergence of social networking
sites such as Facebook, YouTube Twitter and Bebo
are nearly perfectly correlated with the upswing
in New Zealand broadband connections.

actual broadband uptake by distorting the price
signals given to internet users of the real costs of
their usage.

The LLU Inquiry and
Broadband Uptake Politics

However, high levels of broadband uptake were
a political priority for the Government as part of
its Digital Strategy. The Labour-led government
elected in 1999 had already shown its propen-
sity to be influenced by political lobbying from
Telecom's competitors when it instituted the
2000 inquiry (albeit rejecting its more radical
TSO recommendations as a consequence of their
inconsistency with universal service objectives).
As well as introducing industry-specific regula-
tion, the Telecommunications Act 2001 included
an obligation (Section 64) for the Commissioner
to revisit before the end of 2003 whether Local
Loop Unbundling (LLU) should be imposed. A
key consideration for the inquiry was the potential
effect of LLU on infrastructure investment and
broadband uptake levels.
The LLU inquiry, conducted over the course
of 2003, provided a platform for Telecom's
competitors to increase their lobbying efforts. A
key theme underpinning the submissions made
to the Commission by TUANZ and Telecom's
rivals was to implicate Telecom's position as the
dominant firm in the industry (i.e. an absence of
actual competition, measured by the market share
of entrants) in New Zealand's sluggish broadband
uptake rate. Rivals further asserted that LLU, by
increasing the market share of competitors, would
redress the situation 19 - the implication being that
Telecom, due to its dominance had strategically
restricted investment in and supply of broadband
and priced it highly via the use of two-part tariffs.
By contrast, Telecom's submissions included
theoretical and empirical evidence from the New
Zealand and international markets indicating lack
of substantiated evidence of a supply side problem
in the New Zealand broadband market (i.e. prices

THE 'KIWI SHARE', REGULATORY
THREAT AND STRATEGIC GAMING

The preceding two sections have illustrated the
role played by the 'Kiwi Share' in shaping strategic
interaction in both the political and commercial
institutions of the New Zealand telecommunica-
tions sector environment. The 'free local calling'
obligation played a significant role in contributing
towards both New Zealand's world-leading dial-up
internet access and utilisation statistics, and the
comparative absence of supply-side impediments
to widespread broadband uptake, but depressed