TelstraClear ChiefExecutive Allan Freeth's address to TUANZTelecommunications Day, 20 April 2010,

HotelIntercontinental, Wellington

There is an Indian proverb about a merchant on a train with two baskets – one open, the other covered.

In the open basket there are crabs from the sea shore.

But the passengers cannot see what is in the covered basket.

The only clue to its contents is a few feathers poking-out from the weaving, and a soft cooing sound.

On enquiry, the merchant confirms the covered basket contains doves.

He explains the cover is necessary because whenever they have the chance to escape to freedom, they fly away.

The crabs though, he explains with a frown, ensure no one can aspire beyond the pack.

Once one starts climbing out, the rest pull them back - hence no need for a lid or cover.

I often feel that Kiwis – here at home at least, are the crabs with the impulse to pull everyone back into the basket.

Perhaps we can’t stand the thought of letting ideas and people fly away, in a sort of ‘perpetual’ fear that they may succeed, when we did not have the courage to try ourselves.

I have always valued the ‘feet on the ground’ nature of my country; it is the very quality that I have found makes our experience, and judgement, so highly regarded on the world stage.

But, of late, I am tiring of the howls of negativity and phoney outrage, directed at anyone prepared to escape the basket.

Those who show leadership in business, arts, economics, sports or the community, on issues of national significance, are often the victims of a psyche to ‘knock them down ...

and keep them in their place’.

Such negativity can become even more intense about business or industries that grow and become big and successful.

For a country that’s so small, I have always been bemused by the view that ‘big’ business is bad, and the bigger it is, the worse it must be.

Telecommunications certainly falls within the definition of ‘big business’.

And while Telecom’s monopolistic position and behaviours of years past, provided some substance to this dissatisfaction; the populace and politicians seem to confuse the ‘whole’ with the actions of a few.

Our industry is not an easy one to participate in.

‘Right now, right here’ … I believe our industry is unstable.

Competition is intense; margins and core business are declining.

Paradigms are shifting, driven by the web and second-generation digital natives, whose behaviours, by our standards, make them social and economic anarchists.

And there is no relaxing of the huge amounts of capital required, simply to stay in the game.

It is true, though, that we haven’t always helped ourselves.

Five years ago, at this very conference in fact, I gave one of my first speeches as CEO of

TelstraClear, and suggested we were an arrogant industry that believed it could control consumer behaviour.

That won me few friends.

I later suggested broadband alone would not transform New Zealand’s productivity.

That won me the ‘luddite’ award.

So far, so good.

At that time, the grass seed barely out of my pockets, I had just taken over an

organisation that was reeling from a Government back down over unbundling, and

struggling to meet the demands of customers and shareholders alike.

The ensuing few years have both been colourful and eventful, to say the least.

But, in the past five years, our profit has grown – from $2 million to $18 million.

Last year’s profit increase from $7.5 million to $18million was the single biggest increase

in the company’s history – in one of the toughest markets we have ever seen.

Growth in our Consumer business has been fantastic – both on our own network and others.

Revenue increased by almost 19 percent last year and by 14 percent the year before.

Since June 2006, we’ve lifted market share on our Christchurch and Wellington networks from 39 percent to more than 50 percent.

That’s been driven off the back of stellar growth in broadband penetration, which has grown by 42 percent in those cities over the past two years.

TelstraClear’s total broadband market share has also grown – from nine percent in June 2006 to 15 percent in June last year.

On the basis of this success, we invested strategically in local loop unbundling – to make the Telecom network our own, so to speak.

This investment was named Project Gordian, reflective of us cutting through the tangled nature of wholesale relationships.

Our LLU rollout has been the single biggest infrastructure project we’ve undertaken in recent years, and the largest single LLU rollout in the country.

To-date we have unbundled lines in 62 exchanges, investing in excess of $25million.

As a result we have effectively doubled our network reach and potential market.

From a Business and Government perspective, we continue to win projects and customers based on our ability to provide a smooth transition on time and within budget.

We were proud to win Defence and now count among our most recent acquisitions, Toll NZ, Transpower, and Meridian.

And as telecommunications provider to Defence, MAF and Customs, we are also proud to be sharing, in a very tangible way, responsibility for our country’s borders.

Our links with Toll NZ are indicative of another customer success story.

Having sold its rail and ferry business to the Government in 2008, including its entire IT&T

infrastructure and service desk, Toll NZ’s business imperative was a stable technology framework that maximised flexibility.

TelstraClear delivered this as a five-year fully outsourced IT&T solution.

We designed, built, and now manage the entire computing and telecommunications environment – including virtual desktop infrastructure - for more than 500 Toll NZ users.

In fact, like Victor Kiam of Remington Shaver fame, we liked the new virtual desktop technology so much we ‘bought’ it ourselves.

From a network perspective, TelstraClear remains a steady, continuous investor, reflecting our commitment to New Zealand.

We’ve spent more than half a billion dollars in the past five years and continue to invest at around $100 million per annum.

We have a lot of core network, delivering fibre deep into metropolitan and provincial cities.

Our latest investment – at a cost of nearly $10million – involves the upgrading of our Wellington and Christchurch networks to DOCSIS 3 technology.

The project will redefine the meaning of fast, for broadband users in these cities, and will provide speeds of up to 100mbps – delivering that put forward by Government as part of its 10-year plan.

We’ve also extended our national NextIP network to the bottom of the South Island, and in the far North, we’ve enhanced capacity, while investing in systems, to connect to the

Northpower fibre network. Holograms aside, the power of our NextIP network now exceeds demand – placing us ready and willing to meet the requirements of a country that has plans for a national

fibre-to-the-home network.

Our new photonics architecture gives us the ability to upgrade our network to 100 Gig.

It’s difficult to imagine what would drive this demand in the short term, but we’ve got the network in place if it’s required.

Challenges do remain, and customer service is a key one, as seen by the media over the weekend.

The service our customers want from us is vastly different from the service they required three or even two years ago.

Now customers want help with their set top box, or their broadband connection, their modem, or their PC and home network configurations.

Our service staff are having to spend longer with customers and, as our customer base grows, this has placed pressure on our ability to provide an acceptable grade of service.

Like others, inside and outside our industry, we are considering how to improve our customer service, relative to cost, through the use of specialist outsourcing companies.

We’ve had a feasibility study underway in Manila for several months, and are currently in the process of sharing the results of this study with our staff.

So – it has been a challenge, but TelstraClear is now well and truly on solid foundations, and has big aspirations for the future.

And of the future, I have suggested that universal provision of broadband to New Zealand, may not have the desired and envisioned productivity effect without – and this was an important without –more holistic Government policy and support, to drive business investment and growth.

My views on this have not changed, although I note with delight, the increasing adoption of broadband by New Zealanders, in last week’s Statistics New Zealand announcement.

It is the scientist in me, with the need for data and analysis, such as this information, which informs one’s ideas and actions, that drives my views.

Broadband – and, for that matter, fibre to the home – are only part, of what I think, is a complex social and economic challenge for our country.

Statistics – that’s the practice, not the practitioners –may inform us of a significant correlation between an individual’s foot size and height, but it does not mean big feet are responsible for tall people.

Assigning causality is a seductive game and a dangerous one.

Identifying accurately, the drivers of productivity, will be core to successful policy, to drive interventions to stimulate growth and GDP.

I note with interest, the first real attempt at empirical analysis, by economist Arthur Grimes, on the associations between broadband and business productivity in New Zealand.

It is a worthwhile read and one I recommend to you. So, let’s be clear: we support broadband use. No surprise there. Let’s be clear again: we do agree that connectivity is an essential part of business life. It would certainly be bizarre if we did not. But we are saying design interventions with precision, with thought, and with purpose, and, base themon a foundation of empirical research and understanding. In terms of the latest intervention - UFB - I am on record saying that you couldn’t come up with a more complex structure, and discriminatory scheme, than the one we now have.

I see absolutely no logic in excluding wireless technology, from bringing people fast broadband and connectivity, nor the people skilled in doing it.

Nowhere in the world, as far as I am aware, does one access mechanism dominate to the extent, that it excludes all others.

I accept that this may reflect history more than the propensity for future investment, but

it does raise an important question.

Why do policy makers believe that New Zealand will be any different?

The concept that down here, ‘gravity’ does not apply is simply misguided, and may lead us astray in priorities for investment and resources.

Nor are such investments undertaken in stable and predictable landscapes.

Many of the potential eager new entrants have assumed an ‘all else is equal’ environment.

I would suggest, respectfully, that it may pay to factor in an aggressive competitor response from people like us, who have network and a decent-sized customer base.

To us, the present proposal looks likely to play-out, in a way that’s reminiscent of the

Tragedy of the Commons, and I personally believe we should choose the player or the team with the best chance of maximising the ‘commons’ – that  is, the limited resource – for the best outcome. In this case, that’s probably Chorus.

And let’s find a way for them to do so, while regulating for open access and equivalence.

To use an analogy more fitting of 2011, I am at a loss as to why you would set up a system for regional cricket teams to play the Rugby World Cup, having excluded the All Blacks, because they are involved in merchandising. However, as my father is fond of saying: ‘You can’t beat city hall.’ And if that’s how it’s going to be, then that’s how it’s going to be, and we have a proven record in the type of partnerships being envisaged. In 2004, we began working with Network Tasman. At that time, they had built a new 170 km back-up fibre link from Nelson to Blenheim, where it connected with TelstraClear’s existing national fibre network. We then extended the reach of their services by deploying wireless local loop equipment, and offering a full suite of services, across fibre and wireless, to businesses in the Nelson region. Then, in 2008, we worked with Northpower as they built their fibre network, and formed a strong partnership that is really a great prototype of what can be achieved. These ventures demonstrate our ability to partner with non-telco organisations, and operate across multiple networks and technologies. However, a final comment on overbuild, for those of you who are attracted to it. Public money being used to overbuild privately funded networks, is simply like network socialism to me.

We neither intend to be accepting or welcoming of any such new guys, and new entrants should factor that into their business case.

Anyway, that’s enough of that. Let’s talk about some industry issues, and the good our industry does for New Zealand in lots of other ways.

Over the past five years, we have continued to take our responsibilities to New Zealand, our customers, and our communities, seriously … Although our primary task is to connect people, we endeavour to do this in a way that makes their lives better, richer, and more productive. Last year, we alone, took a stance on the misguided legislation relating to copyright and ISPs.

In an online survey,New Zealanders told us that they copy content because they are tired of paying too much, and waiting too long. These are the opinions of the ‘now’ generation and the growing population who has never experienced the world without a TV, computer, or the internet, and the freedom it offers. So despite the new legislation, our view is that this is an issue, far from being resolved. Related to it, is the question of content provision for TV or online services. And it is a situation we are far from happy with. The current competitive situation, around TV content and transmission, is constraining in terms of what we can take to the market and is an area of some priority for us. Talking of TV, my decision in 2005 to remove adult content from our TV line-up, as I felt it was not compatible with a brand like TelstraClear’s, had some interesting reactions. It raised the ire of Bruce Shepherd and his Shareholders Association, and the usual mischievous, or perhaps malicious, underbelly of the media. It was a decision that was consistent with our new policy of being involved in child, youth and family initiatives, as part of our community service. Not too long after that, we were among the first telcos in the industry, to adopt the Department of Internal Affairs filter policy, blocking access to known child-abuse sites on our ISPs.

Despite the screams of the Internet purists, we simply agree with the majority, that child-abuse and child pornography is evil, full stop. Our focus on children has also extended to their safety while on-line – and the issue of cyber bullying. More and more children are accessing the web from a younger age and we want to help their parents keep pace with that change, and keep their children safe. This year we are looking to take our previous initiatives further, with the introduction of Super Clubs Plus.

This is a social networking tool, that helps six to12 year-olds, learn how to stay safe online, as they progress into the open world of Facebook and other social media. We are very proud of these initiatives, and our associations with Lifeline, Save the Children, Crimestoppers New Zealand, the Salvation Army, and, most recently, the Foundation for Youth Development; its Big Walk, and our Youth 2010 Big Download at Parliament. We also love our strong links with the New Zealand Defence Force. This ANZAC weekend, for the second year running, we will be issuing calling cards to the hundreds of Kiwi men and women, currently deployed in combat areas around the world, giving them the opportunity to phone home, and connect with families and friends, free of charge. CSR, or whatever fancy name you care to give it, are activities that provide tangible proof of the benefit, that large organisations bring to the fabric of society. I am very proud to be part of an industry that takes its community responsibilities seriously. Our work is matched by the long history Telecom has had in assisting and building communities, the work of the Vodafone Foundation in youth, and the contributions that many in this room make, in terms of sponsorships and other support. When it comes to protecting New Zealanders and our society, we do work together, either directly, or through industry forums.

Telecommunications is an essential part of the modern world. Telecommunications is big business. But … big does not mean bad, it simply means capability and resources. It’s time New Zealanders valued businesses for what they achieve for our nation, and wished that far more of them were big. Countries and societies that prosper, respect the role that businesses play in creating wealth, and building communities and countries. In my view, such a society believes in the value of competition, and the tenets of capitalism in a healthy and working socially-based democracy. To me, that’s about having the outlook of doves – not crabs – in this wonderful basket, we call our world.