Telco deregulation: A chance for the ‘little guys’

Tuesday May 27, 2014 Written by Bill Carruthers Published in Weekend
The majority stake in Telecom Cook Islands is currently on the table. 14040719 The majority stake in Telecom Cook Islands is currently on the table. 14040719

Local commentator Bill Carruthers has taken a keen interest in telecommunications developments, both here in the Cook Islands and overseas.

In this three-part article he explains why it is not a good idea for locals to buy Telecom Cook Islands shares from Telecom New Zealand, and what alternatives and opportunities there are. This is part two - read part one here.

Paradoxically, the other challenge to traditional telco’s profitability comes from the opposite end of the telecom spectrum. The “really little guys” – these are the potential operators of island or even village wide communications networks.

As more and more satellites go into orbit the opportunities for small independent operators to offer their friends or fellow islanders a reliable, fast, and economical satellite internet based service that allows for cell phone use (usually for free within the same island or community and at similar prices as TCI today to the rest of the world). In addition a locally based entrepreneur could provide a Wi-Fi service which would allow his fellow islanders to use Skype and give them unfettered Internet access via their own VSAT terminal. VSAT is shorthand for Very Small Aperture Terminal –which is a way of connecting to a satellite and then the internet with small and economical equipment and a small – typically a +/- 1.8 meter satellite dish.

The thing that many people still don’t realise is that the hardware required for setting up a direct internet communication centre (VSAT) would cost less than $5000 depending on the size of the satellite dish desired – one area where bigger usually IS better. And to solar power it and set up a simple wireless transmitter and Wi-Fi hub would be about another $5000.

Add in another $5000 for freight and training and other incidentals and for about $15,000 you have the making of a viable Wi-Fi based outer island business on every island. For about another $15,000 or so one could add full 2G or 3G capacity. Why has no one attempted this – simply because TCI would not allow it – instead it has set up the same systems itself and refused to let the islanders even try to use some initiative.

Most of the companies selling VSAT equipment and setups will give a training course to set up and install their equipment over the internet and it typically only takes an average person one or two days and they are set to go. Much of the equipment is designed to be used in marine craft or in military vehicles so it is typically very robust. Some of the units are designed to be “fly away” units that will literally fit in a suitcase. The electronic components usually weigh less than five kg and are sized like a video recorder so it is no big deal to fly in a replacement when necessary, and they are typically priced in a way that even makes having a spare on standby little problem. Ideally the person(s) concerned would have a reasonable knowledge of computers and some degree of mechanical expertise or access to it but it is not “rocket science” by any means.

So it becomes obvious that one does not have to worry about the outer islands “losing” their service under Digicel (who will simply carry on using the presently installed equipment until, and unless they would wish to improve it) or, more hopefully, an aspiring local entrepreneur on each island will be able to offer cheaper and friendlier and more beneficial service than either the locally owned TCI or Digicel would, for a very small capital expenditure. These VSAT based services can easily and for about the same cost be linked to a few more bits of equipment known colloquially as “GSM in a Box”, which enable full 2 and 3G cell and smart phone use if desired.

The other “really small guy “situation would involve businesses who are heavy internet and data users realising that if the ludicrous monopoly levels of TCI pricing were to be maintained, would find it economically attractive to set up their own VSAT system – of course they would be some of TCI’s major customers, so there goes that income stream as well.

But this can only happen if the monopoly is broken.

The other middle to long term issue that local telecoms all over the world will face is the very likely rollout of a cheaper “satellite phone” system. Already one can buy a satellite phone for about $500with a plan that allows calls around the world for as little as US50c per minute. Cheaper than TCI is now.

We will become a laughing stock of the world if we were to attempt to somehow “regulate” such phones under a monopoly regime and, as they become more popular, down goes the revenue again. Already there is available for iPhone users a “SatSleeve” device which slides over the iPhone and gives it direct to satellite capability.

There have been reports that Digicel would reduce the staff at TCI and a degree of horror has been expressed at this. The reality is that it would be very naïve to think that a company operating as a hugely profitable monopoly for over 20 years would not have some degree of “fat” in its personnel areas. It only makes sense that some trimming might have to take place. It would seem to be a relatively silly thing for a potential purchaser to say that the staff levels are already perfect, and will not be adjusted, anyone should be sceptical of such a pronouncement. It should also be noted that it would be in Digicel’s own interest to utilise as many existing staff as possible as opposed to employing expensive expats. Also research shows that the vast majority of Digicel’s staff wherever it operates are locals. There is a drastic shortage of labour, not jobs, in the Cooks, and a glance at the jobs offered columns of the local newspapers will confirm that any staff who are “trimmed” would have little or no difficulty in finding employment. In addition there will be scope for the brightest local staff to advance their status in a large international and regional company. It does one little good to have a brilliant telephone linesman on the team if the game is being played wirelessly.

There is also a considerable feeling amongst some that TCI is some sort of flagship of local success and culture and thus Government must buy back its 20% shareholding so “we” hold the “power” in having the majority shareholding – once again why would we want the majority of a company that can only retain its profitability by maintaining an oppressive monopoly?

Others insist that the Government threw away the shares in the mid 90s thereby losing control of the company – such people are forgetting that up until 1991 there was no TCI – the local and international telephone service was run by Cable & Wireless – a totally foreign owned company, and the radio, telegraph, and post office were run by the Cook Islands Postal Service. Then the Government entered into what might be termed  an “unholy alliance “ with TCNZ and an Australian company and passed retroactive legislation to force the sale of Cable & Wireless assets to the Government consortium for about $8.5 million which was the “book” value at the time. C&W objected to this extortionate behaviour and the parties eventually went to arbitration where C&W were awarded an additional $6.5 million. This gave the company an inflated value of $15 million hence the value of $3 million being paid by TCNZ for the additional 20% of the total shares they later purchased from Government

The Cable & Wireless employees at the time (almost all locals) were hugely critical of the takeover and many even wished to leave with the C&W expat staff. This brief history might give pause to those who seem to think that TCI has somehow been a longstanding and critical asset of the Cook Islands, or that it is an ancient icon like a vaka.

The argument has been made that Digicel will have an “effective” monopoly any way as no other major company would want to compete with an established operator like them. And yes, this could be true; but a crucial difference would be that the “real small guys” could opt out in numbers if they became too greedy. And in these times of revolutionary technology happening on an almost daily basis it is entirely possible that a new company with a better than “O3B” connectivity system could come along and blow Digicel’s existing technology and pricing (and profit) structures out the window.. But there is no hope of that happening with either TCNZ remaining in place with its eternal monopoly, or with a locally owned TCI wielding the same power to control the future.

When people suggest that Cook islanders should buy the shares of TCI they say that one of their reasons for thinking it so valuable is that Digicel must think it is valuable to pay so much for it.

I would suggest that perhaps they may have realised that there was no way the TCNZ monopoly would ever be cracked, and so made a long term corporate decision to buy them out. The money involved would be peanuts to them, as in 2013 they reported revenues of US$2.78 billion. EBITDA (earnings before interest, tax, depreciation and amortisation) was up 11% year on year to US$1.2 billion for the full year. However, they are estimated to have lost about US$198 million after all those items were included. It has been suggested that a desire to broaden their cash flow generation and their asset base may be one of the drivers in their desire to acquire as many diverse markets as possible – including the Cooks. They are also proud of their ever increasing size and so a certain amount of corporate muscle flexing may be involved. Their interest should not be taken as an indication that they think the present rates of return will remain for long.

There are others that declare that Government must “regulate” the telecom market to the nth degree, including pricing structures, no matter who runs it, in order to “protect” the people.

This is an intrinsically flawed idea in that it would be madness to attempt to set mandated prices in a field which has, and very likely will in the future, experience nothing but lowering of prices over the years. There are some technical issues often involving “interconnectivity” of networks and various other issues which are beyond the ken of all but the most esoteric geeks. But these would be best resolved not by having a 500 page Telecom bill which would not be able to see into the future and what might then cause friction; but rather by setting up a simple dispute regulation board who would be able to call on expert advice in the event of a dispute. There could also be some provisions for taxing or otherwise preventing a ridiculously high profit level e.g. a “windfall” profit tax.





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