Strategic Interaction under Asymmetric Regulation - Adoption, Usage, and Global Impact of Broadband Technologies - page 40

in the bundled voice-ADSL market, is also directly
an artefact of the same mandatory tariff policy.
The pattern of strategic interaction evidenced
in the New Zealand market leads to the conclusion
that further distortions will occur as a consequence
of the adverse selection possibilities that the
historic tariff structure has enabled. Competitors
will find it financially most profitable to target
high-volume existing internet users to substitute
their fixed line local voice calling away from
Telecom. As competitor ISPs have historically
served over 50% of dial-up internet customers
(all major ISPs are now either structurally inte-
grated or strategically aligned with a competing
infrastructure provider), they have information
regarding usage patterns of their existing custom-
ers. By targeting only those customers with high
internet usage to switch to the new bundles, but
encouraging the remainder of low-volume dial-
up internet users to remain on Telecom fixed line
services, both bundling benefits and ICA revenues
of competitors are maximised. Telecom will be
left with a disproportionately large share of the
low-volume internet users and voice consumers
with no internet demand at all. With more of the
newly 'low-cost' broadband-purchasing voice
subscribers leaving to join other providers, taking
their 'notional subsidies and discretionary ADSL
payments with them, Telecom has little choice
but to raise its prices to the remaining high-cost
voice-only and dial-up internet-using customers.
Such adverse selection is exacerbated by selective
competitor entry in low-cost urban areas, mak-
ing it even more difficult for Telecom to meet its
universal service obligations and for the regulator
to ascertain how to allocate the annual entrant tax
obligations via the TSO. After minimal changes
to the residential fixed line charge 1990 and 2007,
Telecom has raised its prices twice in the twelve
months following LLU and separation becoming
operational.
Perhaps unsurprisingly, given the pre-existing
conditions in the New Zealand market, unlike
other jurisdictions, competition in the more highly

regulated market post 2006 has not been based
around competition for broadband customers per
se . Rather, competition for broadband customers
has been couched in competition for fixed line
voice customers, but predominantly those with
high levels of existing internet usage (indeed, low
volume dial-up ISP accounts are being advertised
again by some providers). Practically all firms now
market bundles of voice and broadband internet
access, with broadband internet access alone be-
ing charged at a premium of $10 per month more
if not purchased with a fixed line voice account
and long-distance calling package. Reminiscent
of past years, more extensive free local calling
zones than Telecom's are being used by at least
one competitor as an inducement for fixed line
voice consumers to switch. Interestingly, no
competitor is offering a two-part tariff for fixed
line voice services.
Ironically, the substantial changes in market
share engendered by real competition for fixed
line voice customers reignites the debate over the
'universal service' aspects of the 'Kiwi Share'. If
margins previously garnered by Telecom in the
voice market to offset investment in its infrastruc-
tures and to underwrite its own universal service
pricing of ADSL services across the country ir-
respective of the costs of providing those services
are now transferred to competitors, Telecom will
be unable to continue offering a universal broad-
band price and still continue to provide equivalent
quality services in high cost areas.

FUTURE IMPLICATIONS

Asymmetric assignment of the 'Kiwi Share' ob-
ligations, and the strategic responses to them by
both Telecom and its competitors, have clearly
had a significant effect in shaping the New Zea-
land telecommunications sector as it exists to-
day. Regardless of the nature of the legislative
infrastructure prevailing - either competition
law-based or industry-specific regulation - the